What is the opportunity cost of capital, 7% or 12%? The answer is 7%: That’s the rate of
return that your company’s shareholders could get by investing on their own at the same level
of risk as the proposed project. Here the level of risk is zero. (Remember, we are assuming for
now that the future value of the office block is known with certainty.) Your shareholders would
vote unanimously for the investment project, because the project offers a safe return of 14%
versus a safe return of only 7% in financial markets.