question about the implict cost?
Christopher has $200,000 to invest, and he is considering the following business opportunity. He would use his $200,000 to buy a mechanical self-service car wash. He'll earn $40,000 per year from customers who drive through and use the water and soap jets to wash their cars. He'll spend $5,000 per year on maintenance and repair of that machine and $6,000 per year on supplies and utilities (water, soap, and electricity), and the car wash itself will depreciate by $7,000. That is, if he tried to sell it at the end of year, he would get only $193,000 for it. Since this car wash is self-service (drivers pay by using an automatic teller), he won't have to hire an attendant. If Christopher doesn't buy the car wash, he could leave his $200,000 in the bank, where it would earn 10% per year.
What is Christopher's implicit cost of capital if he buys the mechanical car wash?
In economics, an implicit cost occurs when one foregoes an alternative action but does not make an actual payment. (For instance, a firm's use of its own capital. This is considered an implicit cost because the capital could have been rented to another firm instead. This rental income foregone, or the implicit rental rate of capital, is the firm's opportunity cost of using its own capital. Another example is the explicit cost of a night at the movies includes the moviegoer's ticket and soda, but the implicit cost includes the pay he would have earned if he had chosen to work instead.)
Christopher's implicit cost of capital if he buys the mechanical car wash would be the interest he would have earned if he'd laft the $200,000 in the bank and earned the 10% interest; $20,000(10% x $200,000)
Tidalwave Self Service Car Wash
