Question

Jarrett company is considering a cash outlay of $300,000 for the purchase of land, wich it could lease our for $36,000 per year. If alternative investments are available that yield a 9% return, the opportunity cost of the purchase of land is

Answer 1

Answer:

$27,000 per year

Explanation:

The opportunity cost of an investment is the profit or cash flows that the investor must surrender in order to carry out the investment.

In this case, Jarrett is considering investing $300,000 in a land purchase which he will lease for $36,000 per year.

If he decides to make that investment, he will be losing alternative investments that can yield a 9% return. That 9% return that Jarrett is losing by going ahead and purchasing the land, is Jarrett's opportunity cost = $300,000 x 9% = $27,000 per year.