Fred's Widget Company has purchased $500,000 in equipment, which can be sold for a salvage value of $300,000 at any time. The best interest rate on alternative investments is 5%

What is the cost of using this machinery for one year? How would your answer be different if the machinery had not yet been purchased?

Short-run cost = $15,000
Cost if the machinery was not purchased = $200,000 + $25,000 = $225,000
Explanation: The short-run cost is just the forgone interest. The short-run depreciation is sunk, and the salvage value doesn't change. The long-run cost (if the machine has not been purchased) is the depreciation cost plus the foregone interest on the whole $500,000.