Appl Ex 1g

Application Exercise 1g

1) Purchasing the device for $1000 to save $50 per year (i.e. a 5% return on the investment). Investing $1000 in a cheque account to earn 1% pa (i.e. $10 per year or a 1% return on the investment). Investing $1000 in a term deposit to earn 10% pa ($100 per year or a 10% return on the investment)

 2) The opportunity cost Is the $100 per year In Interest on the term deposit that has been foregone.

 3) Leaving the money in the cheque account is the least preferred option instead of earning $10 per year in interest the business could earn $100 per year in interest on a term deposit or effectively earn $50 per year in the form of a reduced electricity bill.

 4) Because the opportunity cost is too great such that your decision has not minimised the opportunity cost. The most rational decision to make under the circumstances is to invest in the term deposit because the (net) benefits of doing so are greater than those derived from purchasing the machine.