A Project's opportunity cost of capital is:
A)The forgone return from investing in the project
B)The return earned by investing in the project
C)Equal to the average return on all company projects
D)Designed to be less than the Project's IRR

Question

Quizplus · Accepted Answer

Opportunity cost of capital is defined as the forgone return from investing in the next best alternative project with similar risk. It represents the minimum required return that an investor must earn to compensate for the risk of investing in a particular project. Therefore, option A is the correct choice. Option B is incorrect as it represents the actual return earned by investing in the project. Option C is incorrect as the opportunity cost of capital is specific to each individual project and is not equal to the average return on all company projects. Option D is incorrect as there is no requirement that the opportunity cost of capital should be less than the project's IRR.

A Project's Opportunity Cost of Capital Is