Calculating Korie's Annual Opportunity Cost of Purchasing a Factory

Scenario 13-1

Korie wants to start her own business making custom furniture. She can purchase a factory that costs $400,000. Korie currently has $500,000 in the bank earning 3 percent interest per year.

Suppose Korie purchases the factory using $200,000 of her own money and $200,000 borrowed from a bank at an interest rate of 6 percent.

To calculate Korie's annual opportunity cost of purchasing the factory, we need to determine the interest she would have earned if she had kept the $200,000 used from her bank account at 3 percent instead of investing it in the factory.

First, let's find the interest earned from the $200,000 in Korie's bank account:

Interest = Principal x Rate = $200,000 x 0.03 = $6,000

Next, let's find the interest paid on the $200,000 borrowed from the bank at 6 percent:

Interest = Principal x Rate = $200,000 x 0.06 = $12,000

Now, we calculate Korie's annual opportunity cost by subtracting the interest earned from the interest paid:

Annual Opportunity Cost = Interest Earned - Interest Paid = $6,000 - $12,000 = -$6,000

Therefore, Korie's annual opportunity cost of purchasing the factory is $6,000.