Exciting Opportunity for Custom Furniture Business
How can Korie finance her dream custom furniture business?
Korie wants to start her own business making custom furniture. She can purchase a factory that costs $400,000. Korie currently has $500,000 in the bank earning 3 percent interest per year. Should she use her own money or borrow from a bank to finance the factory?
Answer:
Korie can finance her dream custom furniture business by using a combination of her own money and a loan from a bank.
Korie's annual opportunity cost of purchasing the factory can be calculated based on the interest rates for her own money and the borrowed amount. By investing $200,000 of her own money, she forgoes the opportunity to earn interest at a rate of 3 percent per year. The remaining $200,000 borrowed from a bank comes with an interest rate of 6 percent.
To calculate the annual opportunity cost:
Opportunity cost with own money = $200,000 * 0.03 = $6,000
Opportunity cost with borrowed money = $200,000 * 0.06 = $12,000
By adding these two costs together, we find:
Total annual opportunity cost = $6,000 + $12,000 = $18,000
Final Answer:
Korie's annual opportunity cost of purchasing the factory is $18,000.
Explanation:
By considering the interest rates on the money used for the purchase, we can determine the total cost of financing the factory. Korie's strategic mix of personal and borrowed funds ensures she can fulfill her dreams while managing the associated costs effectively.