Pure Time Preference Theory of Interest #2

Murphy's Choice uses an example of a tractor to present Böhm-Bawerk's argument for the pure time preference theory and against the productivity theory. Böhm-Bawerk used a different example, but the tractor example serves as well. 

Suppose a tractor is expected to yield an additional $1,000 of revenue each year for the next 10 years before being junked. Böhm-Bawerk in effect argued that the only reason a capitalist could earn money by owning the tractor is that its initial purchase price is less than $10,000. If the tractor would cost $10,000, the capitalist would only break even. If the cost were more than $10,000, the capitalist would expect to lose money. If the tractor cost is $5,000, then the capitalist would earn a 7% [approximate] return, assuming each $1,000 is reinvested until the end of the 10 years.

Note: Assuming no reinvestment, the capitalist could pay $7,022 and earn 7.00%. Solving the equation:

             -7022 + 1000*(1+r)^-1 + 1000*(1+r)^-2 + 1000*(1+r)^-3 + ... + 1000*(1+r)^-10 = 0 

yields r = 0.0700 or 7.00%. The variable r here is commonly called internal rate of return. An equation of this sort is widely used to evaluate capital projects.

"By this procedure, Böhm-Bawerk had transformed his original question. Rather than asking, 'Why do capitalists earn an effortless flow of interest income?', he could instead wonder, 'Why is it that the initial purchase price of capital goods systematically fall short of the future income their use is expected to yield?' Against this metric, Böhm-Bawerk measured all of the explanations of interest that economic theorists had offered before his own writing" (Choice 226).