The opportunity cost of capital must be the minimum required return from any project. Which of the following options best explains why that must be so?
A) Brokers must be able to invest the funds for themselves externally.
B) An internal investment must offer investors more than they can achieve by investing the funds for themselves.
C) An internal investment must offer investors less than they can achieve by saving the funds.
D) An external investment must offer the firm more than they can achieve by saving the funds.

Question

Quizplus · Accepted Answer

The opportunity cost of capital is the return that investors could earn on alternative investments with similar risk. Therefore, for an internal investment to be attractive, it must offer investors a return that is at least as high as what they could earn by investing the same amount elsewhere. Option B best explains this concept.

The Opportunity Cost of Capital Must Be the Minimum Required