Opportunity Cost Formula, Calculation, and What It Can Tell You

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 risk profiles.

Opportunity cost is used to calculate different types of company profit.

• The most common type of profit analysts are familiar with is accounting profit. Accounting profit is the net income calculation often stipulated by Generally Accepted Accounting Principles (GAAP). Only explicit, real costs are subtracted from total revenue.
• Economic profit (and any other calculation above that considers opportunity cost) is strictly an internal value used for strategic decision-making. There are no regulatory bodies that govern public reporting of economic profit or opportunity cost.

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.