If you choose between two summer jobs, the one you do not choose is the opportunity cost of your decision.
What is opportunity cost?
- Opportunity costs are the possible advantages that a person, investor, or company forgoes while deciding between two options.
- Opportunity costs are by definition invisible, making it simple to ignore them.
- Making smarter decisions requires an understanding of the possible opportunities lost when a company or person selects one investment over another.
- The determination of a company's capital structure involves opportunity cost analysis in a significant way.
- To pay lenders and shareholders for the risk of their investments, a corporation must incur costs when issuing both debt and equity capital, but each has an opportunity cost as well.
The difference between the anticipated returns of each alternative is all that needs to be considered when estimating an opportunity cost.
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