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Opportunity costs represent the potential benefits an individual, investor, or business misses out on when choosing one alternative over another. Because opportunity costs are unseen by definition, they can be easily overlooked.
Understanding the potential missed opportunities when a business or individual chooses one investment over another allows for better decision-making.
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Opportunity Cost = Return on best foregone option (FO) – return on chosen option (CO)
The formula for calculating an opportunity cost is simply the difference between the expected returns of each option. company is faced with the following two mutually exclusive options:
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The key difference is that risk compares the actual performance of an investment against the projected performance of the same investment, while opportunity cost compares the actual performance of an investment against the actual performance of another investment.
The key difference is that risk compares the actual performance of an investment against the projected performance of the same investment, while opportunity cost compares the actual performance of an investment against the actual performance of another investment.
Still, one could consider opportunity costs when deciding between two ri
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Opportunity cost is used to calculate different types of company profit.
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The downside of opportunity cost is it is heavily reliant on estimates and assumptions. There's no way of knowing exactly how a different course of action may have played out financially. Therefore, to determine opportunity cost, a company or investor must project the outcome and forecast the financial impact.
This includes projecting sales numbers, market penetration, customer demographics, manufacturing costs, customer returns, and seasonality.
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IDEAS CURATED BY
"There's no money in poetry, but then there's no poetry in money, either." ~ Robert Graves
CURATOR'S NOTE
Considering the value of opportunity costs can guide individuals and organizations to more profitable decision-making.
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Learn more about moneyandinvestments with this collection
The impact of opportunity cost on personal and professional life
Evaluating the benefits and drawbacks of different choices
Understanding the concept of opportunity cost
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