Question

Lara Technologies is considering a total cash outlay of $216,000 for the purchase of land, which it could lease for $36,300 per year. If alternative investments are available that yield a 15% return, the opportunity cost of the purchase of the land is:_______.

a. $35,000.

b. $30,000.

c. $250,000.

d. $4,200.

Answer 1

Opportunity cost is $32,400

Step-by-step explanation:

Opportunity cost is an economic term for expressing cost in terms of forgone alternatives.

The opportunity cost is therefore;

$216,000 x 15% = $32,400 opportunity cost.

The economic profit would therefore be the lease less opportunity cost.

$36,300 - $32,400= $3,900

Please note that had there been 2 or more alternatives, the investment with the highest yield should be taken.