Asked by Nguyen BaoThien on Jul 05, 2024
Verified
Lara Technologies is considering a cash outlay of $250,000 for the purchase of land, which it could lease out for $35,000 per year. If alternative investments that yield a 12% return are available, the opportunity cost of the purchase of the land is
A) $35,000
B) $30,000
C) $250,000
D) $4,200
Opportunity Cost
The cost of the next best alternative that is foregone when a decision is made to choose one option over others.
Cash Outlay
The actual amount of money spent by a company to purchase goods or services, as opposed to accounting estimates or accruals.
Alternative Investments
Assets that do not fall into the conventional investment categories such as stocks, bonds, and cash, examples include real estate, commodities, and hedge funds.
- Discern the ideas of sunk cost, differential cost, and opportunity cost in the context of making choices.
Verified Answer
ZK
Zybrea KnightJul 07, 2024
Final Answer :
B
Explanation :
The opportunity cost of purchasing the land is the income sacrificed by not investing in the alternative investments. The annual income from leasing out the land is $35,000. The alternative investments offer a 12% return, which is equivalent to $30,000 ($250,000 x 0.12). Therefore, the opportunity cost of purchasing the land is $30,000.
Learning Objectives
- Discern the ideas of sunk cost, differential cost, and opportunity cost in the context of making choices.