The appropriate opportunity cost of capital is the return that investors give up on alternative investments with:
A)The same risk
B)The risk-free return
C)The expected return on the TSX 300
D)The normal, common stock risk premium

Question

Quizplus · Accepted Answer

The appropriate opportunity cost of capital should be the return that investors would earn if they invested their money in an alternative investment with the same level of risk as the project being evaluated. Option A correctly identifies this as the appropriate choice. Option B is incorrect because the risk-free return is not relevant for a project with risk. Option C is incorrect because the expected return on the TSX 300 is not necessarily appropriate for a specific project. Option D is incorrect because the normal, common stock risk premium is not specific to the risk level of the project being evaluated.

The Appropriate Opportunity Cost of Capital Is the Return That