laptop-opportunity-cost by wanghonghx

VIEWS: 28 PAGES: 2

									LAPTOP: Opportunity cost
A certain laptop costs $700 (tax included). Assume you have a steady income of
$50/month from your part-time job. Normally you spend $25 each month on junk food,
clothes, or movie rentals. You save the other $25.

Recently you bought a digital camera with your savings, so your savings balance (the
amount you have in the bank) is down to $0.

You are feeling impatient. Now that you have a camera you would like to have a
computer of your own to download and share your pictures. You can get financing from
the store at an annual rate of interest of 19.99%.

If you take the $25.00 you usually save each month and use it to make payments every
month, it will take you 39 months (3 years and 3 months) to pay off you’re the amount
you owe. You will pay $250.56 in interest (financing charges). The total cost of the
principal and the compounded interest will be:

$700 + 250.56 = $950.56

1. What is the opportunity cost of the computer?

If you had saved the money in an investment savings account at a rate of $25/month at
an annual rate of interest of 2.7% you would have saved $911.36. The amount you
would have earned in interest would be approximately, $36.

The total opportunity cost of the computer:

Principal      Interest       lost potential   Total
               charges        savings and      opportunity
                              interest         cost
                              earnings
                              ($911-$700)
+ $700         + $256.00      + $211           = $1167

2. What other alternatives are available to you?


3. What is the opportunity cost of a cellphone that cost an average of $25/month for the
same time period (assume you already own the cellphone).

Credit card interest calculator
http://www.controlcreditcarddebt.com/interest-calculator.html
Investment savings calculator
http://www.ingdirect.ca/en/save-invest/isa/index.html

								
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