In a capital budgeting decision, if NPVs are $100,000 and $75,000, which figure represents the opportunity cost of choosing the higher-NPV project?

In a capital budgeting decision, if NPVs are $100,000 and $75,000, which figure represents the opportunity cost of choosing the higher-NPV project?

• A. $75,000
• B. $100,000
• C. $50,000
• D. $25,000

Answer: (B)

In capital budgeting, the opportunity cost is the value of the best alternative you give up by choosing one option over another. If two mutually exclusive projects have NPVs of 100,000 and 75,000, selecting the higher-NPV project means you forgo the other project's 75,000 NPV. So the opportunity cost is 75,000. The 100,000 figure is the benefit of the chosen project, not the cost of choosing it.

In capital budgeting, the opportunity cost is the value of the best alternative you give up by choosing one option over another. If two mutually exclusive projects have NPVs of 100,000 and 75,000, selecting the higher-NPV project means you forgo the other project's 75,000 NPV. So the opportunity cost is 75,000. The 100,000 figure is the benefit of the chosen project, not the cost of choosing it.