Answered step by step
Verified Expert Solution
Question
1 Approved Answer
You are the CFO of a firm. You are evaluating a potential project for investment, which is similar to other projects that the firm undertakes.
You are the CFO of a firm. You are evaluating a potential project for investment, which is similar to other projects that the firm undertakes. The project will cost $1 million in initial outlay. The firm has $1 million in cash available for investment, which is currently in a bank account earning 2% interest. What is the appropriate discount rate (cost of capital) to use in evaluating the project? Important concept - if in doubt read section 5.4 closely. (Choose the correct response.) O A. Since the firm already has the cash and doesn't need to raise it from external sources, the opportunity cost of capital is zero. B. The opportunity cost of capital is the required rate of return for investors to invest in the firm. O C. Since the firm will lose 2% in interest if it uses the cash, the opportunity cost of capital is 2%. OD. The opportunity cost of capital is the best rate of return currently available from the potential projects that the firm currently has to choose from
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started