Opportunity cost of capital


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Opportunity cost of capital

Expected return that is forgone by investing in a project rather than in comparable financial securities.

Opportunity Cost of Capital

The difference in return between an investment one makes and another that one chose not to make. This may occur in securities trading or in other decisions. For example, if a person has $10,000 to invest and must choose between Stock A and Stock B, the opportunity cost is the difference in their returns. If that person invested $10,000 in Stock A and received a 5% return while Stock B makes a 7% return, the opportunity cost is 2%. One way of conceptualizing opportunity cost is as the amount of money one could have made by making a different investment decision. Importantly, opportunity cost is not a type of risk because there is not a chance of actual loss.
References in periodicals archive ?
The following section shows that the opportunity cost of capital for investing in venture capital or private equity increases with illiquidity and with under-diversification.
Third, we set portfolio opportunity cost equal to the weighted average of the opportunity costs of the market and the venture, and solve for venture opportunity cost of capital.
Except in the case of the limited partnership, the minimum fraction of initial wealth, w, in total assets, K, that the entrepreneur needs to launch the project depends not only on the opportunity cost of capital, r, but also on the project's profitability, k.
Inequality (4) demands that the ratio of the entrepreneur's initial wealth, w, to the initial expenses needed to launch the project, K, must meet a threshold level that is determined by the opportunity cost of capital, r, and the profitability of the project, k.
The time to sell and the opportunity cost of capital are used to determine the investor's opportunity cost of selling the partitioned interest.
The time to partition the center was estimated to be 12 months, and the opportunity cost of capital for an investor in the vacant land was estimated at 10%.
as the opportunity cost of capital plus the expected economic rent:
The net burden imposed by alternative financing arrangements depends upon the incremental cash costs of different financing contracts, the period of time in which these costs are realized, and the borrower's opportunity cost of capital.
The value of the all-equity firm VU is obtained by discounting the free cash flows at the opportunity cost of capital, denoted [r.

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