Question

Jarrett company is considering a total cash outlay of $300,000 for the purchase of land, which it could lease out for $36,000 per year. if alternative investments are available that yield a 9% return, the opportunity cost of the purchase of the land is
a. $36,000
b. $9,000
c. $27,000
d. $72,000

Answer 1

Answer: b. $9,000

There are 2 alternatives for Jarret company. If it will choose the first, the land will give it a profit of $36,000 per year. If it chooses the second, the profit will be 9% of $300,000 or $27,000.

Opportunity cost is ($36,000-$27,000) or $9,000 which is the loss of potential gain from option 1 when one alternative is chosen.