The opportunity cost of capital is equal to:
A)The discount rate that makes project NPV equal zero
B)The return offered by other projects of equal risk
C)A Project's internal rate of return
D)The average rate of return for a firm's projects

Question

Quizplus · Accepted Answer

The opportunity cost of capital is the return that could be earned on the next best alternative investment of similar risk. Therefore, option B is the correct answer as it represents the return offered by other projects of equal risk. Option A is incorrect because it refers to the discount rate that makes project NPV equal zero, which is the required rate of return, not the opportunity cost of capital. Option C is incorrect because it represents the project's own rate of return, not the opportunity cost of capital. Option D is incorrect because it refers to the average rate of return for a firm's projects, which is not necessarily the same as the opportunity cost of capital.

The Opportunity Cost of Capital Is Equal To