Elinore is asked to invest $5,200 in a friend's business with the promise that the friend...
Elinore is asked to invest
$5,200
in a friend's business with the promise that the friend will repay
$5,720
in one year's time. Elinore finds her best alternative to this investment, with similar risk, is one that will pay her
$5,668
in one year's time. U.S. securities of similar term offer a rate of return of
77%.
What is the opportunity cost of capital in this case?
Homework Answers
Return on similar investment = (5,668-5,200)/5,200 = 9%
U.S. Securities offer a rate of return of 77%
Opportunity cost of capital is the benefit in the next best alternative.
Since, U.S Securities provide, higher benefit
Opportunity cost of capital will be 77%
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