Question

Iron Works International is considering a project that would refurbish a run-down building that it currently owns. The building was purchased five years ago for $1.6 million and rented over this period. The rental income was enough to pay off all of the debt on the building. The building could now be sold for $1.7 million. Iron Works is thinking about changing the building into fancy loft apartments for the new trendy marketplace. This would cost $1.9 million to convert the old building to these loft apartments. If converted to loft apartments, Iron Works would generate future income estimated to be $4.9 million on a present value basis. The opportunity cost for this project is which one of the following?

Answer 1

Answer : Opportunity costs is the benefits which an investors forgo when choosing one alternative over another.

In this case if the Iron works thinks to change the building into fancy loft apartments for the new trendy marketplace, then Iron works will not be able to sell its building which could now be sold for $1.7 million.Therefore while evaluating any thing about its future project it should consider the opportunity cost of $1.7 million of not selling the building.