Future Opportunity Cost of an Investment
The future opportunity cost of an investment, also termed its 'future cost', represents the future value a firm forgoes by committing funds to a specific project. This is measured against the next best alternative, typically investing in financial markets. For a one-year project with an initial cost of and a market interest rate of , this opportunity cost is calculated as , which is the amount the firm would have after one year from the alternative investment.
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Future Opportunity Cost of an Investment
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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?
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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 $____.
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Future Opportunity Cost of an Investment
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A company is considering a one-year investment project that is expected to yield a real return of 3%. The guaranteed real interest rate available from investing the same funds in a risk-free financial asset is 4%. Based on this information, the company should undertake the project.
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Explaining Future Opportunity Cost
A company is considering a one-year project that requires an initial investment of $200,000. The prevailing market interest rate is 4%. A manager evaluating the project states that the opportunity cost is simply the initial $200,000 investment. Which of the following statements provides the most accurate analysis of the manager's claim?
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