Amanda invests $500,000 in a new business venture. Which of the following correctly identifies the relevant opportunity cost that she faces?
A) The potential profits from the business
B) The discounted present value of future profits from the business
C) The rate of interest that could have been earned on an a comparably risky $500,000 investment.
D) The probability of losing the initial investment of $500,000
E) The rate of return on $500,000 invested in the business

Question

Quizplus · Accepted Answer

The relevant opportunity cost that Amanda faces is the rate of interest that could have been earned on a comparably risky investment of $500,000. This is because the opportunity cost is the return that could have been earned on the next best alternative investment of equal risk. The potential profits from the business (A) and the rate of return on the $500,000 invested in the business (E) are not opportunity costs, as they are specific to the investment being made. The discounted present value of future profits from the business (B) is not necessarily relevant, as it takes into account the time value of money and assumes that Amanda would hold the investment for a long time period. The probability of losing the initial investment (D) is also not relevant as it is a risk associated with the investment, not an opportunity cost.

Amanda Invests $500,000 in a New Business Venture