Question

A firm is already has a factory that can be used for a project. If the factory can be leased at $500,000 per year. The annual opportunity cost of the property for the project is _____. We assume the corporate tax rate is 40%.

		$0
		$200,000
		$300,000
		$500,000

Answer 1

Correct option is $300000

Explanation

Here, We have 2 options

1) To use factory for the Project

2) To lease the factory for $500000 per year -

It will attract tax of 40% , So net Income per year will be 500000- 200000 = $300000

Now , Opportunity cost of the project means if we are using factory for project then what is the income forgone .

i.e is $300000 - which now we won't earn as we are using factory for a project and are not leasing it .

You can also say that $300000 is the net income per year which should be earned if we use factory for the project.