How can a manager calculate the opportunity cost of capital for a project?

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How can a manager calculate the opportunity cost of capital for a project?




Answer: The opportunity cost of capital is the return investors give up by investing in the project rather than in securities of equivalent risk. Financial managers use the capital asset pricing model to estimate the opportunity cost of capital. The COMPANY COST OF CAPITAL is the expected rate of return demanded by investors in a company, determined by the average risk of the company's assets and operations.
The opportunity cost of capital depends on the use to which the capital is put. Therefore, required rates of return are determined by the risk of the project, not by the risk of the firm's existing business. The PROJECT COST OF CAPITAL is the minimum acceptable expected rate of return on a project given its risk.
Your cash flow forecasts should already factor in the chances of pleasant and unpleasant surprises. Potential bad outcomes should be reflected in the discount rate only to the extent that they affect beta.

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