Last month you lent a work colleague 5000 to cover some over

Last month, you lent a work colleague $5000 to cover some overdue bills. He agreed to pay you in 1 month with interest at 2% for the month, thus owing you $5100. Today, when the repayment is due, he asked you to extend the loan for another month and he would pay you the $5100 next month. In the meantime, you have had the offer to invest as much as you wish in an oil-well venture that is expected to pay 40% per year and a hot new IT stock that is estimated to return 45% the first year. If you let your colleague have another month, what is the opportunity cost of your decision? (Note: Express your answer in dollar and percentage amounts.) The opportunity cost is $ The opportunity cost in percentage is

Solution

Opportunity Cost= Return on most lucrative option - Return on chosen option

Return on chosen option =24%

Return on most lucrative option = 45%

Opportunity cost=21%

Opportunity cost in percentage=21%/24%=87.5%( Kindly type 87.5)