Tiger Woods invested $25,000 in the stock of Golf Academy and Eight years later,
ID: 2518574 • Letter: T
Question
Tiger Woods invested $25,000 in the stock of Golf Academy and Eight years later, Golf Academy shares reached $500,000, but Tiger held onto the shares in the belief that their price would triple in the next five years. Unfortunately, Golf Academy did not triple. Rather the market value of Tiger’s shares today is $300,000. If the shares were sold and the proceeds invested in another investment, they would likely earn 10% per annum.
a. What is the opportunity cost at the end after he knows he could earn 10% on the money he has invested (assume that his current $300,000 investment will generate 3% in the future)?
b. How much of this investment is considered a sunk cost?
Explanation / Answer
a)Opportunity cost if shares are not sold and invested in another investment is the amount of profit forgone : 300000[10% - 3%]
= 300000*7%
= 21000
b)sunk cost is a cost that is incurred in past and thus irrelevant in decision making
a)cost of purchase :$ 25000
b)maket value five years ago : 500000