- CFA Exams
- CFA Level I Exam
- Study Session 4. Economics (1)
- Reading 12. Topics in Demand and Supply Analysis
- Subject 5. Economic Cost vs. Accounting Cost
CFA Practice Question
Uwe, a foreign exchange student, bought a used car for $8,000 and resold it one year later for $5,300. Insurance, license and operating costs for the year were $1,900. What were his economic costs of owning and operating the car for the year if the market rate of interest was 10 percent?
A. $2,700
B. $4,600
C. $5,400
Explanation: The total cost of owning the car is calculated by adding depreciation ($8,000-$5,300=$2,700), operating expenses ($1,900), and implicit costs (the opportunity cost of money tied up in the car = .10 x $8,000 = $800). This sum is equal to $5,400.
User Contributed Comments 6
| User | Comment |
|---|---|
| Yannicklin | why consider $2,700 as depreciation? |
| Xocrevilo | It just refers to the cost of owning the car for the year (i.e. selling price - purchase price). |
| Lamkerst | Opex caould also de deposited to earn interest, no? |
| sheenalim | lamkerst: yes, that interest earned is the implicit costs of $800 calculated in the explnation above. |
| soukhov | Lamkerst right - Uwe may deposit 1900 (Opex) at 10% |
| Sheeb | I added the interest and insurance costs too as part of his implicit costs. |