The opportunity cost of an asset:
A) should be depreciated annually.
B) should be included in the project cash flows.
C) is typically ignored in capital budgeting.
D) is important only for parcels of land.

Question

Quizplus · Accepted Answer

The opportunity cost is the potential benefit that is foregone by choosing one option over another. In capital budgeting, it is important to consider the opportunity cost of an asset as it represents the potential return that could have been earned if the asset was invested in a different project or opportunity. Therefore, it should be included in the project cash flows to provide a comprehensive analysis of the potential returns of a capital investment.

The Opportunity Cost of an Asset