Question

Lara Technologies is considering a total cash outlay of $250,000 for the purchase of land, which it could lease out for $35,000 per year. If alternative investments are available that yield a 12% return, the opportunity cost of the purchase of the land is a. $30,000 b. $4,200 c. $250,000 d. $35,000

Answer 1

opportunity cost = 30,000

Step-by-step explanation:

The opportunity cost is the return in the alternative investment:

250,000 x 12% = 30,000 opportunity cost

The economic profit would be the lease less the opportunity cost

35,000 - 30,000 = 5,000 economic profit

Note: If there was two or more alternatives, we should pick the investment with the highest yield.