Question

How do I figure out the opportunity cost of down payment? What is the opportunity cost rate of a $22,106 loan with $5000 down?

Answer 1

percentage downpayment= DOWN PAYMENT / LOAN

= 5000 / 22106

= 22.62%

We generally want to analyze opportunity costs in terms of investment, whether it's a person or a business making that investment. We can express opportunity cost in terms of a return (or profit) on investment by using the following mathematical formula:

• Opportunity Cost = Return on Most Profitable Investment Choice - Return on Investment Chosen to Pursue

Now suppose on simiar loan another wants down payment of 2500

percentage downpayment = 2500 / 22106

= 11.31%

opportunity cost = opportunity foregone = 22.62% - 11.31% = 11.31%