Question

Elinor is asked to invest $5100 in a friend's business with the promise that the friend will repay $5610 in one year. Eleanor finds her best alternative to this investment, with similar risk, is one that will pay her $5508 in one year. U.S. securities of similar term offer a rate of return of 7%. What is the opportunity cost of capital in this case

Answer 1

the opportunity cost of capital in this case is 8%

Step-by-step explanation:

From the information given :

Elinor is asked to invest $5100 in a friend's business with the promise that the friend will repay $5610 in one year.

Eleanor finds her best alternative to this investment, with similar risk, is one that will pay her $5508 in one year.

U.S. securities of similar term offer a rate of return of 7%.

The opportunity cost of capital can be determined by using the expression:

`A = P ( (1+r)/(100))^n`

where;

A = amount = $5508

P = Principal = $5100

r = opportunity cost of capital = ???

n = number of years = 1 year

`5508= 5100 ( {1+ (r)/(100))^1`

`(5508)/(5100)= ( {1+ (r)/(100))^1`

`1.08 = ( {1+ (r)/(100))`

`1.08 = (100 + r)/(100)`

1.08 × 100 = 100 + r

108 = 100 + r

r = 108 - 100

r = 8%

Therefore; the opportunity cost of capital in this case is 8%