Question

The Opportunity Cost of Capital for a firm considering a project is best described as:

A. The return that investor must be guaranteed to consider approving the project.

B. The return that makes the cash flows equivalent to a government bond (The risk-free rate)

C. The best available expected return in the market for projects of similar risk and duration.

Answer 1

c. The best available expected return in the market for projects of similar risk and duration.

note;

opportunity cost of capital can be considered as the return on the next best project foregone, having similar risk and duration.

Required Rate of return is the return that investor must be guaranteed to consider approving the project.

Risk free rate can be earned by investing in government bonds and there is no need to invest in a project to earn risk free interest.