Question

The rate of return rule states that a firm should invest in any project offering a rate of return that is higher than the:

Answer 1

OPPORTUNITY COST OF CAPITAL

Explanation: Opportunity cost of capital can be described as the incremental return a company foregoes when ever it is embarking on any internal investments.

The rule tries to show that a firm should only embark on projects or investment that will guarantee a higher rate of return after consideration of all the opportunity costs attached to the capital investment.

If the investment is a marketable security if the opportunity costs of capital is less than the expected rate of return,the investment is considering as a wrong choice.