A business is considering a cash outlay of $500,000 for the purchase of land, which it could lease for $40,000 per year.If alternative investments are available that yield a 21% return, the opportunity cost of the purchase of the land is:
A) $105,000.
B) $40,000.
C) $65,000.
D) $8,400.

Question

Quizplus · Accepted Answer

The opportunity cost is the return foregone by not investing in the alternative option. If the business can earn a 21% return on alternative investments, the opportunity cost of investing $500,000 in the land instead is 21% of $500,000, which is $105,000.

A Business Is Considering a Cash Outlay of $500,000 for the Purchase