Explain the concept of opportunity cost and how it is relevant in capital budgeting.

Explain the concept of opportunity cost and how it is relevant in capital budgeting.

The concept of opportunity cost refers to the value of the next best alternative that is forgone when making a decision. In capital budgeting, opportunity cost is relevant because it helps in evaluating the potential benefits and drawbacks of investing in a particular project or asset. When making capital budgeting decisions, companies need to consider the opportunity cost of investing in one project over another. This involves comparing the expected returns and benefits of each project and assessing the potential benefits that could have been gained from investing in the alternative projects. By considering the opportunity cost, companies can make more informed decisions and allocate their resources effectively to maximize their overall returns.