A firm will invest in a project if
A) the interest rate exceeds the opportunity cost of the project.
B) the firm's level of capital is at the desired level.
C) the firm's level of capital is higher than the desired level.
D) the rate of return of the project is greater than the opportunity cost of the investment.

Question

Quizplus · Accepted Answer

A firm will invest in a project only if the rate of return of the project is greater than the opportunity cost of the investment. Opportunity cost is the cost of the next best alternative foregone in terms of the benefits that could have been derived. Therefore, to ensure that the investment is viable, the rate of return of the investment must exceed the opportunity cost of the investment. A is incorrect because the interest rate is not directly related to the decision to invest in a project. B and C are incorrect because the desired level of capital is not the sole determinant of a firm's decision to invest in a project.

A Firm Will Invest in a Project If