Future Opportunity Cost of an Investment

Project Viability Analysis

A company is evaluating a one-year project that requires an initial investment of $50,000. The project is expected to yield a total payoff of $52,000 at the end of the year. The company could alternatively invest the $50,000 in the financial market and earn a guaranteed real interest rate of 5%. Based on a direct comparison of the project's return to its next best alternative, what is the correct decision and justification?

A company should always undertake a project if its expected future payoff is greater than its initial investment cost.

Determining the Break-Even Interest Rate

A firm is evaluating several independent one-year projects, each requiring an initial investment of $200,000. The firm can alternatively invest its funds in the financial market to earn a guaranteed real interest rate of 4%. For each potential project payoff listed below, match it to the correct investment decision.

Critique of an Investment Decision Framework

A company is considering a project with an initial cost of $100,000. The next best alternative is to invest this amount in the financial market for one year at a guaranteed real interest rate of 6%. To justify undertaking the project, its expected payoff must be greater than the value of this alternative. The value of this alternative, which represents the amount the company would have after one year from the financial market investment, is $____.

A manager is deciding whether to approve a new one-year corporate project. Arrange the following steps into the correct logical sequence for making this decision based on a comparison to the next best alternative.

A manufacturing firm has determined that a specific one-year project, requiring an initial outlay of $1,000,000 and expecting a payoff of $1,050,000, is a worthwhile investment. This decision was based on a comparison to the alternative of investing in the financial market. Subsequently, before the final decision is made, the guaranteed real interest rate available in the financial market increases. How does this change in the interest rate affect the original assessment of the project?

Evaluating an Investment Justification