The correct opportunity cost for a project is determined to be 15% and the project is expected to generate $1 million in cash flows at the end of the next four years after an initial outlay of $3 million.Based on this information, the project would plot:
A)above the security market line.
B)below the security market line.
C)on the security market line.
D)on the security market line, with a Beta of 1.0.

Question

Quizplus · Accepted Answer

The opportunity cost of 15% represents the required return for the project, which is used to discount future cash flows. If the project's expected return (based on its cash flows and initial outlay) is less than this required return, it would plot below the security market line (SML), indicating it offers less return for its level of risk compared to the market average.

The Correct Opportunity Cost for a Project Is Determined to Be