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Elinore is asked to invest $5,300 in a​ friend's business with the promise that the friend...

Elinore is asked to invest $5,300 in a​ friend's business with the promise that the friend will repay $5,830 in one​ year's time. Elinore finds her best alternative to this​ investment, with similar​ risk, is one that will pay her $5,777 in one​ year's time. U.S. securities of similar term offer a rate of return of 7​%. What is the opportunity cost of capital in this​ case?

Solutions

Expert Solution

Opportunity cost can be calculated in this case by using the similar risk investment.

r = [FV/PV] - 1

= [$5,777/$5,300] - 1

= 1.09 - 1 = 0.09, or 9%

jeff jeffy answered 2 years ago
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