Opportunity cost of capital called the required rate of return. The opportunity of cost of capital is the expected rate of return. An investor could earn by investing his or her money in financial assets of equivalent risk.
Risk in investment arises because of the uncertain returns investment proposals. Investment evaluated in terms of both expected return and risk. Besides the decision to commit funds in new investment proposals. Capital budgeting also involves replacement decisions. The decision of recommitting funds when an asset becomes less productive or non-profitable.