Question
In: Finance
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%
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