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
Formula and Calculation of Opportunity Cost
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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Economic Profit and Accounting Profit
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)...
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Opportunity Cost and Risk
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 d...
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What Is Opportunity Cost?
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 opportuni...
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How Do You Determine 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...
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IDEAS CURATED BY
"There's no money in poetry, but then there's no poetry in money, either." ~ Robert Graves
Considering the value of opportunity costs can guide individuals and organizations to more profitable decision-making.
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Calculating Opportunity Cost
The way to calculate the opportunity cost is to subtract the value of the option from the value of the alternative that is foregone.
Opportunity Cost = Return on the best foregone alternative - Return on the chosen option.
Opportunity Cost: You Can Do Anything but Not Everything
When mulling over multiple choices, the quality of any option cannot be assessed in isolation from its alternatives. The price you pay (or the sacrifice you make, or the benefits you give up) for doing what you’ve chosen to do instead of doing something else is the opportunity cost.
Opportunity Cost in Non-financial Situations
Opportunity cost in non-financial situations is more difficult to quantify. The loss or gain with choosing an option while foregoing another can be subjective and not readily comparable.
Example: While deciding on which job offer to take, we may consider job satisfaction, brand name, com...
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