4. Mary has decided to get a two-year degree from a local technical school, desp

Question

4. Mary has decided to get a two-year degree from a local technical school, despite being offered a job at the local hardware store for $11 dollars per hour, 40 hours per week. She quickly calculates that she would have made $45,760 in the two years she was at school. $45,760, the cost of her next best option, is considered a/an A. erosion cost. B. cash outflow cost. C. opportunity cost. D Sunk CoST 11. You're working on a bid to build two apartment buildings a year for the next three years. This project requires the purchase of S1,089,000 of equipment that will be depreciated using straight-line depreciation to a zero book value over the project's life. The equipment can be sold at the end of the project for $815,000. You'll also need S280,000 in net working capital over the life of the project. The fixed costs will be $528,000 a year, and the variable costs will be $1,640,000 per building. Your required rate of return is 18 percent for this project, and your tax rate is 35 percent. What's the minimal amount, rounded to the nearest $100, you should bid per building? A. $2,780,600 B. $4,233,000 C. $2,116.200 D. $4,489,500

Explanation / Answer

4.

Answer: Opportunity cost; C

This is the value of benefit foregone out of the best alternative because the alternative is not chosen.

The person didn’t accept the job and goes for studying; the remuneration out of the job is foregone here; therefore, this is the opportunity cost.

Opportunity cost = Hours per week × Dollars per hour × Number of weeks in a year × Number of years

                             = 40 × $11 × 52 × 2

                             = $45,760

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