Question

Consulting work: Work on your own (graded) When you decided to start your consulting company, you were previously earning S 50,000/year working for the large private consulting company Accenture. When you started the business it cost $ 100,000 to rent an office building, purchase computers, furniture and other office equipment. What was your opportunity cost f opening your own consulting company?

Answer 1

Opportunity cost is the cost of something you sacrifice for making a particular decision. Here, the cost of opportunity of leaving a job to start a business will be :

Opportunity Cost = Salary lost due to starting a business + Money initially spend on setting up of business + interest lost on initial investment (which you could have otherwise earned had you invested the money elsewhere) - potential profit from the business

Here, let us calculate annual opportunity cost

Salary lost per year = $50,000

Money initially spend = $100,000

Let us assume the interest rate to be 2%. At this rate, had you not spend the money on starting the business:

interest per year = 100,000 X 2 X 1 / 100 = $2000

Thus, opportunity cost = 50,000 + 100,000 + 2000 - potential profit from the business

Therefore, Opportunity Cost is $1,52,000 - potential profit from the business per year