The appropriate opportunity cost of capital is the return that investors give up on alternative investments that:
A) possess the same level of risk.
B) earn the risk-free rate of return.
C) are included in the S&P 500 index.
D) earn the average market rate of return.

Question

Quizplus · Accepted Answer

The appropriate opportunity cost of capital should reflect the return that investors could earn by investing in assets of similar risk. If the alternative investments have a different level of risk than the project being evaluated, then the opportunity cost of capital would not accurately reflect the risk associated with the project. Therefore, the best choice is A, which states that the alternative investments possess the same level of risk. B, C, and D are not appropriate because they do not necessarily reflect the risk of the project being evaluated.

The Appropriate Opportunity Cost of Capital Is the Return That