Question

    The incremental return on investment that a business

    foregoes when it elects to use funds for an internal project, rather than investing cash in a marketable security, is called?
    A Cost of capital Correct Answer Incorrect Answer
    B Investment opportunity Correct Answer Incorrect Answer
    C Opportunity cost of capital Correct Answer Incorrect Answer
    D Expected capital cost Correct Answer Incorrect Answer
    E Market returns opportunity Correct Answer Incorrect Answer

    Solution

    Opportunity cost of capital is the return or income forgone in investing in a particular project, instead of investing the same sum in 'government' securities. If the projected return on the internal project is less than the expected rate of return on a marketable security, one would not invest in the internal project, assuming that this is the only basis for the decision. The opportunity cost of capital is the difference between the returns on the two projects.

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