Questions on Opportunity Cost

Submitted by Reeta on Tue, 03/05/2013 - 05:21
 
You have to select between four projects. Project A with Net Present value (NPV) of 
$100,000, Project B with NPV of $70,000,  Project C with Net Present value (NPV) of 
$105,000 and Project D with NPV of $95,000. What is the opportunity cost of selecting 
Project C ?
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mercurie

Tue, 03/05/2013 - 05:55

 Is it the total of NPVs of Projects A,B and D? I am not sure.

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admin

Tue, 03/05/2013 - 06:27

Opportunity Cost is the second best NPV which you forego in the process of selecting a project in preference to the Best one.  You lost/give up that opporunity and the corresponding project cost is defined as Opportunity Cost.  If a numerical question is given, calculate the NPV of each project, arrange them in ascending order and pick the 2nd from top as opporunity cost.

Reeta

Tue, 03/05/2013 - 06:50

Thanks for the reply but there is one more confusion-

 

So here I think Opportuity cost is = 100$

If we arrange-

C- 105$

A- 100$

D- 95$

B- 70$

.

What will be the opp cost if we choose D with NPV 95$. Is it 70$ or 100$, 

Pls clerify......

Ahmad1111

Wed, 03/06/2013 - 15:24

 You are right, it is $100. Opportunity cost is the highest NPV you didn't choose. So if you choose D, opportunity cost is $105.