Question

"Hilary is working for a consulting firm making $60,000 per year but considers starting her own consulting company. Hilary has determined that to launch the business, she needs to invest $100,000 of her own funds. The annual cost of running the business will include $75,000 for the rent of the office space, $190,000 for employee wages, and $6,000 for materials and utilities. Hilary plans to manage the business, which means that she will have to quit her current job. Suppose that the interest rate (or rate of return) on investments in the economy is 6%."
a. Hilary total implicit cost per year is_____ .
b. Hilary's total cost per year is______

Answer 1

Answer:

1. Total implicit cost per year = $66,000

2. Total cost per year = $337,000

Explanation:

Given:

Salary = $60,000

Investment = $100,000

Rent = $75,000

Wages = $190,000

Materials and utilities = $6,000

Rate of return = 6%

Computation:

1. Total implicit cost per year:

Total implicit cost per year = Salary give up + Return on investment

Total implicit cost per year = $60,000 + ($100,000 x 6%)

Total implicit cost per year = $60,000 + $6,000

Total implicit cost per year = $66,000

2. Total cost per year:

Total cost per year = Total implicit cost per year + Rent + Wages + Materials and utilities

Total cost per year = $66,000 + $75,000 + $190,000 + $6,000

Total cost per year = $337,000