Opportunity Costs

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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Rick De Vlieger Rick De Vlieger
12-03-2015 1 min read
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