Suppose a mechanic uses $150,000 of his own money to start a business. The rate of interest he could earn in a savings account is 5 percent, and the rate of interest he could earn by investing in bonds is 8 percent. What is the opportunity cost of capital when the mechanic uses his money to start his own business?
A)$8,000/year
B)$7,500/year
C)$150,000
D)$12,000/year
E)$19,500/year

Question

Quizplus · Accepted Answer

Opportunity cost of capital is the return foregone from the next best alternative investment. Here, the mechanic has two options either to invest in a savings account with a 5% rate of interest or invest in bonds with an 8% rate of interest. 
Hence, the opportunity cost of capital is the return foregone from investing in the bonds, which is:
= $150,000 x 8% = $12,000 per year. 
Therefore, the answer is D).

Suppose a Mechanic Uses $150,000 of His Own Money to Start