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31 July, 17:46

Jarrett company is considering a total cash outlay of $300,000 for the purchase of land, which it could lease out for $36,000 per year. if alternative investments are available that yield a 9% return, the opportunity cost of the purchase of the land is

a. $36,000

b. $9,000

c. $27,000

d. $72,000

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  1. 31 July, 18:12
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    Answer: b. $9,000

    There are 2 alternatives for Jarret company. If it will choose the first, the land will give it a profit of $36,000 per year. If it chooses the second, the profit will be 9% of $300,000 or $27,000.

    Opportunity cost is ($36,000-$27,000) or $9,000 which is the loss of potential gain from option 1 when one alternative is chosen.
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