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7 August, 04:22

Why do financial managers refer to the opportunity cost of capital? How would you find the opportunity cost of capital for a safe investment?

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  1. 7 August, 04:55
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    To find the opportunity cost of capital for a safe investment, managers and investors look at current interest rates on safe debt securities.

    Explanation:

    Opportunity cost of capital refers to the return that could have been earned by investing in another investment opportunity with comparable risk.
  2. 7 August, 06:41
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    Opportunity cost of the capital is usually (if we consider the tax implications on the returns demanded by the lenders) the return required by the investors

    Explanation:

    So assume that I am appraising a project and I need an investment of round about 1 million dollars. If I fund this investment from loan which costs me 10% and also increases the financial cost then its opportunity cost is 10% interest and additional risk increased. However I also have an offer from one of my friends who is willing to invest in this project and is offering me $0.5 million equity investment and demands 20% return on this investment alongwith lower financial risk. So the opportunity cost of this equity investment is 20% cost of equity along with lower financial risk.

    We can find opportunity cost of capital for a safe investment from the yield of government gilts or treasury bond's yield on investment.
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