Question

What is the maximum amount you would pay for an asset that generates an income of $ 250,000 at the end of each of five years if the opportunity cost of using funds is 8 percent?

Answer 1

Answer:

170,146

Explanation:

$250,000 / (1.08)5= 170,146

Answer 2

The correct statement will be that one can pay a maximum amount of $170,145 for an asset of $250,000 if the opportunity cost is 8 percent for a period of five years.

The computation can be done by calculating the opportunity cost by applying the formula of present value of an annuity at the end of five years using the given values.

Opportunity Cost

• An opportunity cost is referred to as opportunity foregone in order to deploy an amount of money at some other class of investment or expense.

• The calculation of opportunity cost as ascertainment of present value can be done as below,

• $\rm Present\ Value= Future\ Value (\dfrac{1}{1+r})^n$

• Where r stands for rate of return and n stands for the number of years. Now inserting the value we get,

• $\rm Present\ Value= 250000(\dfrac{1}{1.08})^5\\\\\rm Present\ Value=\ 170145$

• So the opportunity cost is calculated as $170,145.

Hence, the maximum amount as a part of the opportunity cost a person can spend to obtain 250000 USD at the end of each of 5 years at a return of 8 percent is $170,145.

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