A recent college graduate has the choice of buying a new car for $40,000 or investing the money for four years with a 6% expected annual rate of return. If the graduate decides to purchase the car, the best estimate of the opportunity cost of that decision is:
A)$2,400
B)$9,600
C)$40,000
D)zero since there is no opportunity cost for this decision

Question

Quizplus · Accepted Answer

The opportunity cost of buying a car instead of investing the money is the income that could be earned from investing the money. The expected return on the investment is 6%. Over four years, the investment would grow to:
$40,000 x (1 + 0.06)^4 = $51,735.84
Therefore, the opportunity cost of buying the car is:
$51,735.84 - $40,000 = $11,735.84
This is equivalent to an annual opportunity cost of about $2,934. Therefore, the best estimate of the opportunity cost is $9,600 (rounded to the nearest hundred).

Therefore, the best choice is to invest the money instead of buying the car.

A Recent College Graduate Has the Choice of Buying a New