Doug wants to start up his own business,and needs $25,000 to get it off the ground.He can either withdraw it from his savings account,where he currently earns 3 percent,or he can take out a loan for $25,000 and pay 5 percent interest.Doug should compare:

Question

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The implicit cost of using his savings account is the interest he would have earned if he kept the money in the account. This is $750 ($25,000 x 3%). The explicit cost of taking out a loan is the interest he would have to pay, which is $1,250 ($25,000 x 5%). Comparing these costs, he would be better off using his savings account, as the implicit cost is lower than the explicit cost.

Doug Wants to Start Up His Own Business,and Needs $25,000