Question

Elinore is asked to invest $ 4 comma 900 in a​ friend's business with the promise that the friend will repay $ 5 comma 390 in one​ year's time. Elinore finds her best alternative to this​ investment, with similar​ risk, is one that will pay her $ 5 comma 341 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?

Answer 1

Answer:

0.09 or 9%

Explanation:

This question has some irregularities. The correct question should be :

Elinore is asked to invest $4,900 in a​ friend's business with the promise that the friend will repay $5,390 in one​ year's time. Elinore finds her best alternative to this​ investment, with similar​ risk, is one that will pay her $ 5,341 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?

Solution

Given from the question

Investment (I) = $4,900

Return on investment (ROI) in one year = $5,341

Rate or opportunity cost of capital r is given by

ROI = I × (1 + r)

input the given data

$5,341 = $4,900 (1 + r)

$5,341 = $4,900 + $4,900r

$5,341 - $4,900 = $4,900r

r = ($5,341 - $4,900) / $4,900

r = 0.09

Or 9% in percentage