A business is considering a cash outlay of $250,000 for the purchase of land, which it could lease for $35,000 per year. If alternative investments are available which yield an 18% return, the opportunity cost of the purchase of the land is:
A) $35,000
B) $45,000
C) $10,000
D) $6,300

Question

Quizplus · Accepted Answer

The opportunity cost is the return that the business would forgo by investing in the land instead of the alternative investment that yields 18%.

First, we need to calculate the annual opportunity cost of the alternative investment:

18% of the cash outlay = 0.18 x $250,000 = $45,000

Therefore, if the business invests $250,000 in the land, it would forgo earning $45,000 per year from the alternative investment.

Since the land would generate $35,000 per year in lease income, the net opportunity cost would be:

$45,000 - $35,000 = $10,000

Therefore, the opportunity cost of purchasing the land is $10,000 per year.

The best choice is B because it represents the annual opportunity cost that the business would forgo by investing in the land.

A Business Is Considering a Cash Outlay of $250,000 for the Purchase