ECONOMICS

Detailed explanation-1: -Answer: The correct answer is option B. Explanation: Capital budgeting considers the opportunity cost.

Detailed explanation-2: -But to summarize, the cost of capital is the opportunity cost of the investors who provide capital. It serves as a crucial link between corporate finance and investing, as it sets the minimum rate of return a company should be willing to accept to invest in its business.

Detailed explanation-3: -When evaluating a potential investment, include opportunity costs in the analysis. For a capital investment project, a company should evaluate the expected return of the investment compared to the opportunity cost. Opportunity costs are also the expected returns of an alternative investment of equal risk.

Detailed explanation-4: -The Difference Between Opportunity Cost and Sunk Cost A sunk cost is money already spent in the past, while opportunity cost is the potential returns not earned in the future on an investment because the capital was invested elsewhere.

Detailed explanation-5: -The concept of a company’s cost of capital is used in capital budgeting as a potential basic discount rate to be applied to expected future cash flows from a proposed investment project being subjected to evaluation for acceptance or rejection.