Opportunity cost

1.

The expected return that is foregone by investing in a project, rather than in the next best use of capital or other resources.

It is the opportunity cost of capital and other resources that is the relevant economic measure for financial decision making purposes.

Opportunity cost is an important and powerful concept in cash management.

Examples of opportunity costs include leaving cash in a non-interest bearing bank account.

The organisation loses the opportunity to pay down debt (and save interest) or to invest the cash elsewhere (and earn interest).

2.

The term 'opportunity cost' is also sometimes used to mean the same as 'opportunity loss'.

Opportunity losses may result from analysis paralysis, other factors, or both.

See also

• Analysis paralysis
• Cost
• Cost of capital
• Cost of equity
• Float
• Heuristic
• Internal rate of return
• Opportunity cost of capital
• Opportunity loss
• Production possibility curves
• Sunk cost fallacy
• Sunk costs
• Supernormal profit
• Value dating