Opportunity Cost

C

Opportunity cost is defined as the return on the best alternative use of an asset, or the highest return that will not be earned if funds are invested in a particular project

The correct answer to the question is C. Opportunity Cost.

Opportunity cost refers to the potential benefit or return that is foregone when choosing one investment or project over another. It represents the return on the best alternative use of an asset, which would have been obtained if the funds were invested elsewhere.

In the context of the question, when deciding whether to invest in a particular project, the opportunity cost is the highest return that could have been earned by investing those funds in an alternative project or investment opportunity.

To understand opportunity cost, consider a simplified example. Let's say you have $10,000 and you are considering two investment options:

Option A: Invest in a project that is expected to provide a return of 5% per year. Option B: Invest in a different project that is expected to provide a return of 7% per year.

If you choose Option A, the opportunity cost would be the return you could have earned from Option B, which is 7%. In this case, the opportunity cost is the difference between the return on the chosen project (5%) and the return on the best alternative project (7%), which is 2%.

Therefore, opportunity cost is an important concept in investment decision-making as it helps evaluate the potential benefits and drawbacks of choosing one investment or project over another. By considering the opportunity cost, investors can assess the potential gains they may be giving up by selecting a particular option.