Opportunity cost (redirected from Oppurtunity Cost)

opportunity cost

The best alternative that is forgone because a particular course of action is pursued. An example is the interest income that is given up when large balances are kept in a checking account. Likewise, purchasing a home means that less money is available for another investment.

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Opportunity cost. When you make an investment decision, there is often a next best alternative that you decided not to take, such as buying one stock and passing up the opportunity to buy a different one.

The difference between the value of the decision you did make and the value of the alternative is the opportunity cost.

If you decide to invest in a risky stock hoping to realize a high return, you give up the return you might have earned on a bond or blue chip stock. So if the risky stock fails to perform, and you only make 3% on it when you might have made 6% on a blue chip, then the opportunity cost of the risky investment is 3%.

Of course, if your stock pick pays off, there will have been no opportunity cost, because you will make more than the 6% available from the safer investment.

Businesses must also consider opportunity costs in their decision-making. If a company is considering a capital investment, it must also consider the return it would earn if, instead of going ahead with the capital project, it invested the same amount of money in some other way.

In general, a business will only make a capital investment if the opportunity cost is lower than the projected earnings from the new project.