Opportunity cost

Opportunity cost is a cash flow that a firm must forgo in order to accept a project. For example, if the project requires the use of a building that could otherwise be sold, then the market value of the building is an opportunity cost of the project.

Definitions

According to Financial Management Theory and Practice by Eugene F. Brigham and Michael C. Ehrhardt (13th edition),

Opportunity cost. A cash flow that a firm must forgo in order to accept a project. For example, if the project requires the use of a building that could otherwise be sold, then the market value of the building is an opportunity cost of the project.

According to Fundamentals of Financial Management by Eugene F. Brigham and Joel F. Houston (15th edition),

Opportunity cost. The rate of return you could earn on an alternative investment of similar risk.

Opportunity costs. The best return that could be earned on assets the firm already owns if those assets are not used for the new project.

According to Principles of Economics by Timothy Taylor (3rd edition),

Opportunity cost. Whatever must be given up to obtain something that is desired.

According to Cost Accounting by Horngren, Datar, Rajan (14th edition),

Opportunity cost. The contribution to operating income that is forgone or rejected by not using a limited resource in its next-best alternative use.

According to Managerial Accounting by Braun, Tietz (5th edition),

Opportunity cost. The benefit forgone by choosing a particular alternative course of action.

Related concepts

• Financial management. A combination of enterprise efforts undertaken in order to procure and utilize monetary resources of the enterprise.

Related lectures

• Introduction to Financial Management.