Last month, you lent a work colleague $5000 to cover some overdue bills. He agre
ID: 1145197 • Letter: L
Question
Last month, you lent a work colleague $5000 to cover some overdue bills. He agreed to pay you in 1 month with interest at 2% for the month, thus owing you $5100. Today, when the repayment is due, he asked you to extend the loan for another month and he would pay you the $5100 next month. In the meantime, you have had the offer to invest as much as you wish in an oil-well venture that is expected to pay 22% per year and a hot new IT stock that is estimated to return 48% the first year. If you let your colleague have another month, what is the opportunity cost of your decision? (Note: Express your answer in dollar and percentage amounts.)
The opportunity cost is $ .
The opportunity cost in percentage is %.
Explanation / Answer
Since the friend will pay only 5100 next month the return is 0%. Thus is because 5000 had become 5100 after first month and will remain 5100 after one more month passes
The absolute opportunity cost is 48% of 5100=2448 per year
The opportunity cost =48 % per year.
Note opportunity cost is the highest amount you can gain in alternative use which here is 48%.Also note we have used annual figures not monthly.
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