The opportunity cost of capital is equal to:
A) the discount rate that makes the 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 have been earned from the next best alternative investment having equivalent risk. This means that it is the return offered by other projects of equal risk. Choice A is incorrect because the discount rate that makes the project NPV equal zero is the project's required rate of return, not opportunity cost of capital. Choice C is incorrect as the internal rate of return is the discount rate at which the NPV of a project equals zero. And choice D is incorrect as the average rate of return for a firm's projects does not take into consideration the time value of money or the risk associated with the investment.

The Opportunity Cost of Capital Is Equal To