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

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.

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.