Question

Tommy Wang received an inheritance from his grandmother of $100,000. Rather than put the $100,000 that his grandmother left him in a mutual fund that earns 5% each year, Tommy Wang quit his job, which paid $60,000 per year, and started Wang's Wicker Furniture Store. He rented a showroom for $20,000 for the year, purchased $60,000 in wicker furniture, and incurred costs of $40,000 for sales help and advertising. In his first year, his revenue was $150,000. What is the opportunity cost of Wang's $100,000 inheritance being used to start his business?

Answer 1

Total opportunity cost = $65,000

Step-by-step explanation:

Opportunity cost is the value of the next best alternative sacrificed in favor of a decision. Opportunity cost is also known as implicit cost. It is the value of the sacrificed made to take a course of action

For Tommy Wang, they include the following :

1. The interest he would have earned if had invested the $100,000 into a mutual funds

Interest forfeited = 5% × $100,000 = 5000 per annum

2. The forfeited salary = $60,000 per annum

Total opportunity cost = 5000 + 60,000 = $65,000

Kindly note that the rest of the costs are not opportunity costs