Scenario 13-2
Joe wants to start his own business.The business he wants to start will require that he purchase a factory that costs $500,000.To finance this purchase, he will use $200,000 of his own money, on which he has been earning 10 percent interest per year.In addition, he will borrow $300,000, and he will pay 12 percent interest per year on that loan.
-Refer to Scenario 13-2.For the first year of operation,what is the explicit cost of purchasing the factory
A)$12,000
B)$20,000
C)$36,000
D)$44,000

Question

Quizplus · Accepted Answer

The explicit cost of purchasing the factory for the first year of operation can be calculated by adding the interest paid on the borrowed money and the opportunity cost of using Joe's own money.

Interest on borrowed money: 
$300,000 x 0.12 = $36,000

Opportunity cost of using Joe's own money: 
$200,000 x 0.10 = $20,000

Total explicit cost: 
$36,000 + $20,000 = $56,000

Therefore, the best choice is C, with an explicit cost of $56,000 for the first year of operation.

Scenario 13-2 Joe Wants to Start His Own Business.The Business He Wants