HELP PLEASE !! ENGINEERING ECONOMY !! HELP ! At the peak of the financial crisis
ID: 1167824 • Letter: H
Question
HELP PLEASE !! ENGINEERING ECONOMY !! HELP !
At the peak of the financial crisis , you had lost 40% of your stock holdings , leaving you with stocks with $10,000. you asked your family for advice on what to do with your money . Your mother recommended that you buy property at prices that were at record lows , entering a potential of 25% over the next year , if the property market recovered. Your sister your sister recommended that you withdraw your money and invest it in a 12 month bank deposit , which pays 5% per annum. Your aunt recommended that you withdraw your money and keep it locked up in your safe.
a) If you decided to follow your mothers advice , what is the opportunity cost of this choice ? Explain
b) If you decided to follow your aunts's advice , what is the opportunity cost of this choice ? Explain
Explanation / Answer
If mother's advice is followed then the interest of 5% per annum on the bank deposit is lost. Hence the opportunity cost is equal to 5% of $10000 = $500. This is in the worst scenario where the property market will not recover.
If aunt's advice is to be followed then the interest of 5% p.a. on the bank deposit is lost as well as 25% potential returns if the property market recovered will also be lost. So the total opportunity cost will be = $500 + $2500 = $3000
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