Scenario 13-2
Chelsea wants to start her own Christmas ornament business. She can purchase a suitable factory that costs $100,000. Chelsea currently has $150,000 in the bank earning 3 percent interest per year.
-Refer to Scenario 13-2. Suppose Chelsea purchases the factory using $50,000 of her own money and $50,000 borrowed from a bank at an interest rate of 6 percent. What is Chelsea's annual opportunity cost of purchasing the factory?

Question

Quizplus · Accepted Answer

Chelsea's annual opportunity cost is the amount of interest she could have earned on her money if she had not used it to purchase the factory. She used $50,000 of her own money, so the interest she could have earned at 3 percent is $1,500 (50,000 x 0.03 = 1,500). She also borrowed $50,000 at an interest rate of 6 percent, so the interest on that loan is $3,000 (50,000 x 0.06 = 3,000). Her total annual opportunity cost is $4,500 (1,500 + 3,000). Therefore, the best choice is C.

Scenario 13-2 Chelsea Wants to Start Her Own Christmas Ornament Business. She