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.
Copyright © 2012, Campbell R. Harvey. All Rights Reserved.

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.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved
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. And all of the subcases can be summarized as follows:
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.
This observation suggests that the reduction in the opportunity cost of capital of large public companies or hedge funds outweighs the potential improvement in governance associated with private partnerships.
Waiting is valuable because interest rates are stochastic and, thus, the opportunity cost of capital may be lower tomorrow than it is today.
Second, although it is important to point out evidence against the CAPM, it is even more important to provide a valid alternative for computing the opportunity cost of capital. Economic profits, of which EVA is one version, are a sound economic concept.
As assumed, the entrepreneur and the investor face the same opportunity cost of capital. Because the investor breaks even, there is no difference in the costs of capital to the entrepreneur with respect to outside versus inside equity.
The potential loss of income to the seller is based on an investor's estimated opportunity cost of capital. The average time to partition the property is determined by an analysis of property partition cases.
Our focus in this section is, therefore, on imperfections, such as taxes, that drive a wedge between the opportunity cost of capital in the public and private sectors.(19)
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.
A definition of EVA is net operating profit after taxes (NOPAT), less an internal charge for the capital employed in the business (i.e., opportunity cost of capital).
But investors are simply applying an age-old textbook valuation model--present value equals future cash flow streams discounted at the opportunity cost of capital. With this model, seemingly minor news that implies a reduced growth rate will significantly affect valuation.
Nevertheless, it would be incorrect to use the opportunity cost of capital in holding-cost calculations to measure the effects of inventory reduction.

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