Lara Technologies is considering a cash outlay of $250,000 for the purchase of land,which it could lease out for $35,000 per year.If alternative investments are available that yield a 12% return,the opportunity cost of the purchase of the land is
A) $35,000
B) $30,000
C) $250,000
D) $4,200

Question

Quizplus · Accepted Answer

The opportunity cost is the return that could be earned from the best alternative investment. In this case, the alternative investments yield 12% return, so the opportunity cost of investing in the land is the return of this alternative investment.
Thus, the opportunity cost is 12%*250,000 = $30,000.
Since the annual lease income from the land is $35,000, which is higher than the opportunity cost of $30,000, it is a viable investment. Therefore, the best choice is to purchase the land.

Lara Technologies Is Considering a Cash Outlay of $250,000 for the Purchase