Elinore is asked to invest $5000 in a friend's business with the promise that the friend will repay $5500 in one year's time.Elinore finds her best alternative to this investment,with similar risk,is one that will pay her $5400 in one year's time.U.S.securities of similar term offer a rate of return of 6%.What is the opportunity cost of capital in this case?

Question

Quizplus · Accepted Answer

The opportunity cost of capital is the return that could be earned by investing in the best alternative investment opportunity. Here, Elinore's best alternative investment option offers a return of $5400 in one year, which is less than $5500 promised by the friend. Therefore, Elinore should invest in her friend's business. However, we need to calculate the opportunity cost of capital to see whether she is making a wise decision. The U.S. securities offer a return of 6%. Since this is the return that Elinore could earn with similar risk, this is the opportunity cost of capital. 
So, the correct answer is B - 8%.

Elinore Is Asked to Invest $5000 in a Friend's Business