A major electronics manufacturer expects to generate additional revenue from its recently won government contract. The company f
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Answer:
the opportunity cost of capital in this case is 8%
Explanation:
From the information given :
Elinor is asked to invest $5100 in a friend's business with the promise that the friend will repay $5610 in one year.
Eleanor finds her best alternative to this investment, with similar risk, is one that will pay her $5508 in one year.
U.S. securities of similar term offer a rate of return of 7%.
The opportunity cost of capital can be determined by using the expression:
where;
A = amount = $5508
P = Principal = $5100
r = opportunity cost of capital = ???
n = number of years = 1 year
1.08 × 100 = 100 + r
108 = 100 + r
r = 108 - 100
r = 8%
Therefore; the opportunity cost of capital in this case is 8%