A company is considering two projects, Alpha and Beta. Project Alpha is expected to result in a $50 million net profit, while project Beta and is expected to net $45 million. Both projects could be very lucrative and rewarding. However, the financial controller has stated that the company can only invest in one of these projects.

If project Alpha is selected, what will be the opportunity cost?

A. $95 million
B. $50 million
C. $45 million
D. $5 million

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HINT: Opportunity cost is defined as the value of the alternative that is not chosen.

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Answer and Explanation:
The correct answer is C.

Opportunity cost is regarded as the value of the alternative that is not chosen. If the decision is made to select project Alpha and forego the $45 million in potential profit from project Beta, the opportunity cost of this decision is $45 million, the value of project Beta.

Details for each option:

A. Incorrect. Opportunity cost is the value of the project not selected. $95 million is the sum of both projects and would only be correct if the company did not select either alternative. The question is asked from the perspective of project Alpha being selected and, therefore, the opportunity cost would be the value of project Beta which is $45 million.

B. Incorrect. $50 million represents the potential profit from project Alpha. Since opportunity cost refers to the value of the project not selected and project Alpha was selected, the company will forgo $45 million, the value of project Beta, as an opportunity cost.

C. Correct. Opportunity cost refers to the opportunity given up by selecting one project over another. If the decision is made to go with project Alpha and forego the $45 million in potential profit from project Beta, this means the opportunity cost of this decision is $45 million, the value of project Beta.

D. Incorrect. project Alpha has an anticipated net profit of $5 million more than project Beta. The opportunity cost is represented by the potential net profit of the project not selected rather than the difference between the two projects.