Question

A business is considering a cash outlay of $880,000 for the purchase of land, which it intends to lease for $200,000 per year. If alternative investments are available that yield a 15% return, the opportunity cost of the purchase of the land is:___________.
a. $102,000.
b. $132,000.
c. $200,000.
d. $175,000.

Answer 1

Answer:

b. $132,000

Explanation:

Opportunity cost is an economic term for expressing cost in terms of foregone alternatives. From the above, we can infer that the company is considering a cash outlay of $880,000 for the purchase of land which it could lease for $200,000 per year and the alternative investment would bring in return 15% yield.

It therefore means that the opportunity cost for the purchase of land would be;

= Initial cash outlay × yield returns

= $880,000 × 15%

= $132,000

The opportunity cost of the purchase of the land is $132,000