Question

A firm decides to expand its operations and use more square footage in their main office. Currently, they rent out 3000 square feet of space at a rate of $3,431.00 per month. The new expansion will use this space. The firm has a cost of capital of 9.00% APR. If the tax rate is 35.00% facing the firm, what is the opportunity cost of using this space?

Answer 1

Answer: $297,353.33

Explanation:

In calculating the Opportunity Cost of using that space with the available data, the following formula can be used (notice that APR is a yearly figure and the rent is monthly),

Opportunity cost = Rent per month *12* (1-tax rate) / APR

= $3,431.00 * 12 * ( 1 - 0.35) / 0.09

= 297353.333333

= $297,353.33

$297,353.33 is the opportunity cost of using this space.

Note the method used above is the faster method but if you want to use the other method, first you change the rent to a monthly figure. Then you divide it by the cost of capital to get the present value. Then you multiply by the After tax rate of (1 - tax rate). It's basically the same as the above though.