RSM322H1 Lecture 3: Lecture 3 - RSM322
Document Summary
Opportunity cost of capital: benefits of investing capital in a bank account that is forgone when that capital is invested in some other alternative. Importance for decision making: when expected cash flows occur in different time periods. Capital budgeting: analysis of investment alternatives involving cash flows received or paid over time. Capital budgeting is used for decisions about replacing equipment, lease or buy, and plant acquisitions. A dollar today is worth more than a dollar tomorrow, because you could invest the dollar today and have your dollar plus interest tomorrow. Alternative: invest ,000 in bank account earning, invest ,000 in project returning ,000. Alternative b forgoes the of interest that could have been earned from the bank account. The opportunity cost of selecting alternative b is ,050. of one year. Since investment decisions are being made now at beginning of the investment period, all future cash flows must be converted to their equivalent dollars now.
