a. In capital budgeting, what is meant by opportunity cost. Give one example of an opportunity cost.

b. Five years ago, your company spent $5,000,000 in building the foundations for a night market. The plan was to have small businesses set up stalls to trade their goods similar to the markets seen in South East Asia. Traders were to pay a rent for the space they used. However, local competitors persuaded the local government to rezone the area such that your company would not be able to continue with their development. You are considering using the old foundations to build an office building. Should you include the $5,000,000 spent five years ago? Give reasons for your answer

c. Depreciation is an accounting concept that does not relate directly to current cash flows. How does it impact on a capital budgeting decision?

d. Should a company use the weighted average cost of capital as the hurdle rate for every project in which they invest? Explain your answer.

e. Explain how working capital is treated in capital budgeting.