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302 Corporate Finance BRILLIANT’S

3. Performance appraisal: Further, the cost 3. na\$m°_}Ýg Aà¡Ob… H¡${nQ>b H$s H$m°ñQ> Q>m°n
of capital framework can be used to evaluate _¡ZoO_oÝQ> H$mo AnZo \$m`ZopÝe`b na\$m_}Ýg H$m _yë`m§H$Z
the financial performance of top management. H$aZo _| ghm`H$ {gÕ hmoVr h¡Ÿ& Bg àH$ma Ho$ _yë`m§H$Z _|
Such an evaluation will involve a comparison
of actual profitabilities of the investment H§$nZr Ûmam àma§^ {H$E JE àmoOoŠQ> Ho$ dmñV{dH$ bm^ H$s
projects undertaken by the firm with the pro- VwbZm, gånyU© H¡${nQ>b H$s AZw_m{ZV H$m°ñQ> go H$s OmVr h¡
jected overall cost of capital and raising the VWm Amdí`H$ \§$S> CnbãY H$am`m OmVm h¡Ÿ&
required funds.
The cost of capital also plays a useful role Bgr àH$ma H¡${nQ>b H$s H$m°ñQ>, H$a§Q> AgoQ²>g _|
in dividend decision and investment in cur- BÝdoñQ>_|Q> gå~ÝYr {ZU©` _| ^r _hËdnyU© ê$n go ghm`H$
rent assets. hmoVr h¡Ÿ&

Opportunity Cost of Capital H¡${nQ>b H$s Am°ßÀ`y©{ZQ>r H$m°ñQ>
Decision Making is a process of choosing {ZU©` boZo H$m AW© {d{^Þ CnbãY {dH$ënm| _| go
among alternatives. In the investment deci- {H$gr EH$ {dH$ën H$m M`Z H$aZm h¡Ÿ& BÝdoñQ>_|Q> g§~§Yr
sions, an individual or a manager encounters {ZU©` _| EH$ ì`{º$ `m _¡ZoOa Ho$ g_j BÝdoñQ>_|Q> g§~§Yr
innumerable competing investment opportu- {d{^Þ {dH$ën CnbãY hmoVo h¢Ÿ& _mZ cr{OE, BÝdoñQ>_|Q> Ho$
nities to choose a firm. Suppose, there are two Xmo Adga CnbãY h¢- h_ `m Vmo 11%, 3-dfr©` nmoñQ>b
investment opportunities- we may invest ei-
ther in 11%, 3-year postal certificates or in g{Q>©{\$Ho$Q> _| `m ~¢H$ _| 12%, 3-dfr©` ñWm`r O_m _|
12%, 3-year fixed deposit in a bank. In both BÝdoñQ> H$a gH$Vo h¢Ÿ& XmoZm| hr pñW{V`m| _| gaH$ma Ûmam
cases, the payment is assured by the govern- YZ dmngr H$s ½`maÝQ>r h¡ Bg{cE g_mZ [añH$ h¡ & `{X h_
ment, so the investment opportunities reflect ~¢H$ _| ñWm`r O_m dmbo {dH$ën H$m MwZmd H$aVo h¢ Vmo h_|
equivalent risk. Suppose, we decide to deposit nmoñQ>b g{Q>©{\$Ho$Q> dmbo {dH$ën _| BÝdoñQ> H$m Adga
our savings in the bank. By this action, we N>mo‹S>Zm n‹S>oJm (Š`m|{H$ h_mao nmg BÝdoñQ> H$aZo hoVw CnbãY
have foregone the opportunities of investing in YZ gr{_V h¡)Ÿ& g§jon _|, Am°ßÀ`y©{ZQ>rO H$m°ñQ> go Ame`
postal certificate. In brief, opportunity cost is
the rate of return foregone on the next alterna- {H$gr EH$ {dH$ën H$mo MwZZo Ho$ H$maU CgHo$ {ZH$Q>V_
tive investment opportunity of comparable {dH$ën go hmoZo dmbr g§^m{dV Am` go h¡, Omo h_ gr{_V
risk. gmYZm| Ho$ H$maU A{O©V Zht H$a gH$VoŸ&
Shareholders Opportunities eo¶ahmoëS>g© Am°ßÀ¶y©{ZQ>rO

In the case of companies, there is a H$ånZrO Ho$ Ho$g ‘|, ‘¡ZoO‘|Q> VWm Am°Za{en XmoZm|
separation between management and AbJ-AbJ hmoVo h¢& BÝdoñQ>‘|Q> Ho$ {S>grOZ ‘¡ZoO‘|Q> Ûmam
ownership. Investment decisions are made by {bE OmVo h¢ O~{H$ H¡${nQ>b eo¶ahmoëS>g© Ûmam gßbm¶ H$s
management but the capital is supplied by
OmVr h¡& Bg{bE ¶h àíZ CR>Vm h¢ {H$ BÝdoñQ>‘|Q> àmoOo³Q>
shareholders. Therefore, a question may be
raised whose opportunity cost should be Ho$ Bd¡ë¶yEeZ Ho$ Xm¡amZ {H$gH$s Am°ßÀ¶y©{ZQ>r H$m°ñQ> H$mo
ܶmZ ‘| aIm OmZm Mm{hE& ¶{X ’$‘© H$m CX²Xoí¶ Am°Za H$s
considered in evaluating the investment
projects? If the firm's objective is to maximize d¡ëW H$mo ‘¡p³O‘mBO H$aZm h¡ Vmo BÝdoñQ>‘|Q> àmoOo³Q>
the owner's wealth, then the investment eo¶ahmoëS>g© H$mo ‘hËd XoVm h¡& ‘mZ br{OE EH$ hr ì¶p³V
projects value to shareholders. Suppose, one is ‘¡ZoOa VWm Am°Za XmoZm| h¡ dh BÝdoñQ>‘|Q> {S>grOÝg ^r