Articles on: Investment Glossary

Opportunity Cost

Opportunity costs represent the potential benefits that an individual, investor, or business misses out on when choosing one alternative over another. Because opportunity costs are unseen by definition, they can be easily overlooked. Understanding the potential missed opportunities when a business or individual chooses one investment over another allows for better decision making.
To properly evaluate opportunity costs, the costs and benefits of every option available must be considered and weighed against the others.
Considering the value of opportunity costs can guide individuals and organizations to more profitable decision-making.
Opportunity cost is a strictly internal cost used for strategic contemplation; it is not included in accounting profit and is excluded from external financial reporting.
Examples of opportunity cost include investing in a new manufacturing plant in Los Angeles as opposed to Mexico City, deciding not to upgrade company equipment, or opting for the most expensive product packaging option over cheaper options.
Formula for Opportunity Cost
Opportunity Cost=FO−CO
FO=Return on best forgone option
CO=Return on chosen option​​

Updated on: 24/04/2023

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