Opportunity Costs

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Explanation of the concept of Opportunity Costs. Opportunity Costs are not real costs. In business, the term 'opportunity costs' means that you might have made more profit from another project. A company has only a limited amount of capital and personnel to execute projects. If a project is executed that turns out not to be very profitable in the end, and instead a project is not executed that would have been more profitable, then there is an opportunity cost.

An example of how to calculate opportunity costs: Project A is forecast at 3 million profit over 5 years. Project B has a forecast of 2 million over 5 years. Let's assume that the projects cost the same amount of time and money to execute. Due to lack of capacity, only project A is implemented. In the end, the revenues turn out to be disappointing, and only one hundred thousand dollars have been made in five years' time. Then the opportunity costs (2 million - 100,000 =) would have been 1.9 million dollar. Of course, for the sake of convenience, we assume that project B would have achieved the intended profit.

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