Opportunity Cost of Capital

Posted in Finance, Accounting and Economics Terms, Total Reads: 688
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Definition: Opportunity Cost of Capital

It can be defined as the expected return that is forgone by investing in a project rather than in comparable financial securities.

The opportunity cost of capital of a company increases as it takes riskier projects.

Example:

Company A wants to build a new factory. It requires 10 lakhs capital to build this factory. Company A does not have so much capital available so it wants to borrow this amount from the market in the form of debt. Suppose bank B lends this amount to A. B requires return of 10% on this amount. So opportunity cost of capital for company A for this project becomes 10%.


 

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