Opportunity Cost of Capital

Investment Decision Scenario

An individual has $50,000 to invest. They have identified two options. Option A is to invest in a friend's established, stable business, which has consistently provided investors with a 6% annual return. Option B is to invest in a new, unproven technology company. Based on the core principle that guides a rational investor's decision, what is the minimum annual return the technology company must be projected to offer for the individual to even consider it a worthwhile investment?

Board of Directors' Project Decision

A company's board of directors is evaluating a new project that is projected to yield a 3% annual return. The average return for other investments with a similar level of risk in the market is currently 5%. According to the fundamental principle guiding shareholder investment, the board should approve this project because it generates a positive profit for the firm.

Evaluating a CEO's Strategic Vision

A firm is currently providing an 8% annual return to its shareholders. For each of the following market scenarios, match it with the most likely reaction from the firm's shareholders, based on the principle that they seek a return at least as great as their next best alternative.

Crafting an Investor Pitch

For a firm to successfully attract and retain shareholder capital, the return it offers must be at least as great as the return shareholders could earn from their ____.

A company's management is deciding whether to invest in a new internal project. To ensure they are acting in the best interest of their shareholders, they must compare the project's potential earnings against what those shareholders could earn elsewhere. Arrange the following steps in the correct logical order that management should follow to make this decision.

Evaluating a Corporate Expansion Project