The opportunity cost of cash is represented by which of the following?

• A. Debt payments made on loans
• B. Investment returns in other assets
• C. Average market interest rates
• D. Cash reserves held by the company

Answer: (B)

The opportunity cost of cash refers to the potential returns that a company is foregoing by keeping funds in cash rather than investing them in other assets that could generate a higher return. Therefore, the correct representation of opportunity cost in this context is the investment returns that could have been earned from alternative investments if the cash were not held in reserve.

When cash is kept idle, it misses the chance to appreciate through investments such as stocks, bonds, or real estate, which typically offer higher returns than the cash itself earns through interest in a bank account or other low-yielding cash equivalent. This concept is critical in financial decision-making, as it guides companies in evaluating the best use of their funds to maximize potential financial growth.