Scenario 13-1 Korie Wants to Start Her Own Business Making Custom Furniture

question 29

Multiple Choice

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.
-Refer to Scenario 13-1. If Korie purchases the factory with her own money, what is the annual implicit opportunity cost of purchasing the factory?

• A)$0
• B)$3,000
• C)$12,000
• D)$15,000

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Definitions:

Discount Rate

A rate used to convert future cash flows into their present value, fundamental in the assessment of investment attractiveness.

IRR

Internal Rate of Return (IRR) is a financial measure used to evaluate the profitability of potential investments by calculating the interest rate at which the net present value of all the cash flows (both positive and negative) from a project or investment equals zero.

Initial Cost

The initial outlay or expenditure associated with the purchase or acquisition of an asset, not including ongoing operating or maintenance costs.

Revenue

The total amount of income generated by the sale of goods or services related to a company's primary operations.