Project Selection - Opportunity Cost



Definition
Opportunity Cost is the highest value a person needs to give up for the selected choice.

For example, if you have US $10, you can either buy a coffee or an apple pie. When you buy the apple pie, your opportunity cost is coffee.

There is no calculation required for getting the opportunity cost.

Sample Question
You need to select one of the three proposed projects. However, owing to the limitation of capital, only one project can be chosen. Project A would have a NPV of US$100,000, Project B would have a NPV of US$120,000 while Project C would have a NPV of US$50,000. What is the opportunity cost of choosing the project with the highest NPV?

A. US$120,000
B. US$50,000
C. US$100,000
D. US$150,000

Solution: C

Note
Do note that Opportunity Cost is simply the highest value of the project not being selected. No addition, subtraction required!

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