Which of the following statements about the opportunity cost associated with a capital budgeting project is correct?
A)A project's opportunity cost is a cash outlay that the firm has already paid; therefore, it should not be included in a capital budgeting analysis.
B)The terms sunk cost and opportunity cost generally are used interchangeably.
C)A project's opportunity cost is the return (cash flow) that will not be earned (generated) if funds are invested in a particular capital budgeting project.
D)A project's opportunity cost is not a relevant cash flow, therefore it should not be included in the capital budgeting analysis.
E)A project's opportunity cost reflects the change in a firm's net cash flow that is attributable to purchasing the project.

Question

Quizplus · Accepted Answer

A project's opportunity cost is the potential return (cash flow) that will not be earned (generated) if funds are invested in a particular capital budgeting project. This cost should be considered in the analysis since it represents the foregone opportunity to earn a return by investing in an alternative project or investment. Sunk costs, on the other hand, are costs that have already been incurred and should not be considered in the analysis since they cannot be recovered.

Which of the Following Statements About the Opportunity Cost Associated