Question

slader When you decided to start your consulting company, you were previously earning $ 50,000/year working forthe large private consulting company Accenture. When you started the business it cost $ 100,000 to rent anoffice building, purchase computers, furniture and other office equipment. What was your opportunity costof opening your own consulting company

Answer 1

Opportunity cost refers to value of sacrifice one make for making a particular decision. Here, the cost of opportunity of leaving a job to start a business will be = Salary lost due to starting a business + Money initially spend on setting up of business + interest lost on initial investment (which you could have otherwise earned had you invested the money elsewhere) - potential profit from the business

Calculating the annual opportunity cost

Salary lost per year = $50,000

Money initially spend = $100,000

Let us assume the interest rate to be 2% and at this rate as i have not spend the money on starting the business. So interest per year = 100,000 * 2 * 1 / 100 = $2000

Thus, opportunity cost = $50,000 + $100,000 + $2000 - potential profit from the business. So therefore, Opportunity Cost is $152,000 - potential profit from the business per year.