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 ?
From the above arguments, the annual profit function for the retailer can be expressed as [PI](T) = -holding cost + selling profit - ordering cost - annual opportunity cost of capital.
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.
Waiting is valuable because interest rates are stochastic and, thus, the opportunity cost of capital may be lower tomorrow than it is today.
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.
The time to sell and the opportunity cost of capital are used to determine the investor's opportunity cost of selling the partitioned interest.
Since similar opportunities are open to private-sector firms, the rate of interest on government debt is the opportunity cost of capital for a risk-free investment by both the public and private sectors.
The 15 per cent is the opportunity cost of capital, the minimum expected rate of return to prompt your investment, the required rate of return or the hurdle rate.
Has advantages over the internal rate of return method, which assumes that the cash can be reinvested at the internal rate of return rather than the opportunity cost of capital.
However, in industries characterized by excess capacity and where the existence of a secondhand market for capital is doubtful, for example, fishing, the opportunity cost of capital is not clear.
In general, individuals should consider the after-tax cash flows associated with alternative borrowing arrangements, the period of time in which these cash flows occur, and the opportunity cost of capital in order to identify the least costly financing alternative.
As for opportunity cost, it must be underlined its being identical, from an economic and financial perspective, to discount rate, given fact computation of (net) present value of an investment project implies identification of opportunity cost of capital with unit of measure of firm's efforts and results, namely:

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