Scenario 13-1
Joe wants to start his own business,which will require that he purchase a factory that costs $400,000.Joe currently has $500,000 in the bank earning 3 percent interest per year.
-Refer to Scenario 13-1.Suppose Joe purchases the factory using $200,000 of his own money and $200,000 borrowed from a bank at an interest rate of 6 percent.What is Joe's annual opportunity cost of purchasing the factory?

Question

Quizplus · Accepted Answer

The annual opportunity cost of purchasing the factory is the interest Joe could have earned on the $200,000 he used to buy the factory plus the interest he has to pay on the $200,000 loan he took from the bank.

Interest on the $200,000 Joe used: 
$200,000 x 3% = $6,000

Interest on the $200,000 loan from the bank: 
$200,000 x 6% = $12,000

Total annual opportunity cost: 
$6,000 + $12,000 = $18,000

Scenario 13-1 Joe Wants to Start His Own Business,which Will Require That