Question

Suppose that Abdul opens a coffee shop. He receives a loan from a bank for $100,000. He withdraws $50,000 from his personal savings account. The interest rate on the loan is 8%, and the interest rate on his savings account is 2%.Refer to Scenario 13-4. Abdul's annual implicit cost of capital isa. $8,000. b. $4,000. c. $2,000. d. $1,000.

Answer 1

The annual implicit cost of capital for Abdul is $9,000.

Step-by-step explanation:

The annual implicit cost of capital for Abdul can be calculated by adding the interest on the loan and the interest foregone on his savings account. The loan amount is $100,000 with an interest rate of 8%, so the interest on the loan is $100,000 × 0.08 = $8,000. Abdul withdrew $50,000 from his personal savings account, which would have earned an interest of $50,000 × 0.02 = $1,000.

Therefore, the annual implicit cost of capital for Abdul is $8,000 + $1,000 = $9,000.

Answer 2

d. $1,000

Step-by-step explanation:

Implicit cost is the cost which has been incurred, and cannot be avoided. It is best described as an opportunity cost that has been foregone, here the funds have been borrowed specially for coffee shop. Interest expense of $8,000 is the cost for such borrowing, also the amount withdrawn from savings account have been used for coffee shop but the interest income foregone is the opportunity cost = $50,000.00
`*` 2% = $1,000 is implicit cost.

Therefore, correct option is d. $1,000