Liquidating debt and buy back stock

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Assume the company in the above example foregoes new equipment and invests in the stock market instead.If the selected securities decrease in value, the company could end up losing money rather than enjoying the expected 12 percent return.

The opportunity cost of choosing this option is 10% - 0%, or 10%.However, businesses must also consider the opportunity cost of each option.Assume that, given a set amount of money for investment, a business must choose between investing funds in securities or using it to purchase new equipment.When assessing the potential profitability of various investments, businesses look for the option that is likely to yield the greatest return.Often, they can determine this by looking at the expected rate of return for an investment vehicle.

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