When a manager does not accept a positive-NPV project,shareholders face an opportunity cost in the amount of the:
A) project's initial cost.
B) project's NPV.
C) project's discounted cash inflows.
D) soft capital rationing budget.

Question

Quizplus · Accepted Answer

The NPV of a project represents the present value of its expected cash inflows minus the present value of its expected cash outflows. If a positive-NPV project is rejected, it means that its cash inflows could have generated a return higher than the cost of capital, but the opportunity was missed. Therefore, shareholders face an opportunity cost in the amount of the project's NPV, which represents the value that could have been created but was not. The other options do not represent the opportunity cost of a positive-NPV project. The initial cost represents the sunk cost, which is not relevant for the decision at hand. The discounted cash inflows represent the benefit of the project, not the cost of not having it. The soft capital rationing budget is a limit on the available funds, but it is not directly related to the value of the project.

When a Manager Does Not Accept a Positive-NPV Project,shareholders Face