Suppose that a firm can invest $100 today in a project and receive $105 a year from today. There is no inflation, and the annual interest rate in the economy is 6%. The firm should
A) invest in the project because the opportunity cost is less than the return on the investment.
B) invest in the project because the opportunity cost is greater than the return on the investment.
C) invest in the project because the opportunity cost is the same as the return on the investment.
D) not invest in the project because the opportunity cost is greater than the return on the investment.

Question

Quizplus · Accepted Answer

The opportunity cost of investing $100 is the interest it could earn in a year at the annual interest rate of 6%, which would be $106. Since the project returns only $105, the opportunity cost ($106) is greater than the return on the investment ($105), making it a less favorable option.

Suppose That a Firm Can Invest $100 Today in a Project