opportunity costs

Содержание
  1. What Is Opportunity Cost and What Does It Mean for You?
  2. Explicit vs. Implicit Opportunity Costs
  3. Explicit opportunity costs
  4. Implicit opportunity costs
  5. Opportunity Cost Examples
  6. How to Calculate Opportunity Cost
  7. Three Key Factors of Opportunity Cost
  8. 1. Money
  9. 2. Time
  10. 3. Effort/Sweat equity
  11. Terms Related to Opportunity Cost That You Need to Know
  12. The law of increased opportunity cost
  13. Comparative advantage
  14. Sunk Costs
  15. Trade-offs
  16. Risk
  17. Opportunity Cost Formula | Step by Step Calculation
  18. Example #1 – Reliance JIO
  19. Example #2 – Paytm Investment Opp
  20. Opportunity Cost Calculator
  21. Interpretation
  22. Opportunity Cost Calculation in Excel
  23. Recommended Articles –
  24. Альтернативные издержки: что такое, как рассчитать
  25. Что такое альтернативные издержки?
  26. Виды альтернативных издержек
  27. Явные альтернативные издержки
  28. Скрытые альтернативные издержки
  29. Как рассчитать альтернативные издержки?
  30. Закон увеличения альтернативных издержек
  31. Использование теории альтернативных издержек
  32. Opportunity Cost — Learn How to Calculate & Use Opportunity Cost
  33. Considering Alternative Decisions
  34. How is Opportunity Cost Calculated?
  35. Application of Opportunity Cost
  36. Other Costs in Decision-Making: Incremental Costs
  37. Other Costs in Decision-Making: Sunk Cost
  38. Other Resources
  39. Opportunity Cost Formula | Calculator (Excel template)
  40. Opportunity Cost Formula – Example #1
  41. Opportunity Cost Formula – Example #2
  42. Opportunity Cost Formula – Example #3
  43. Explanation of Opportunity Cost Formula
  44. Relevance and Uses of Opportunity Cost Formula
  45. Opportunity Cost Formula Calculator
  46. Opportunity Cost Formula in Excel (With Excel Template)
  47. Recommended Articles

What Is Opportunity Cost and What Does It Mean for You?

opportunity costs

Opportunity cost is largely defined as a decision you make that alters your personal landscape going forward.

Opportunity costs can impact various — and critical — aspects of your life, including money, career, home and family, and other lifestyle elements. In general, it means having to choose one option over the other, be it money, time or lifestyle choices — and living with the consequences.

If you are a business owner, opportunity cost is going to come into play frequently. You will have to spend a lot of time weighing whether or not the inevitable consequences of a given decision are outweighed by the gains that decision will bring. And whether business or personal, opportunity cost will often be a tangible figure.

To gain a different perspective on opportunity cost, ask yourself this question: What scenarios can occur if I opt for one path over another? What's more, what outcome am I leaving on the table and how is that my opportunity cost?

Explicit vs. Implicit Opportunity Costs

Economists break down opportunity costs in two ways — via «explicit» and «implicit» opportunity costs.

Explicit opportunity costs

An explicit cost is, as one would imply, a cost that is explicitly shown in your accounting records. It's a cost that will be reflected somewhere in the income statement.

Let's say you own a landscaping company and you add several brand-new lawn mowers to your business for $3,000. In that regard, your explicit opportunity cost is any alternative use of that $3,000.

The cash could have been used to place more advertising in your community, to upgrade your company's website, or as a down payment on a new truck for your company.

What outcome results from your decision to buy those lawn mowers over other business options is the manifestation of your opportunity cost.

Implicit opportunity costs

With implicit opportunity costs, the formula is moderately different, primarily because there is no direct accounting cost stemming from implicit opportunity cost (i.e., you chose to spend $3,000 on lawn mowers over a down payment for a new truck for your company.

) Consider a small business owner who foregoes a salary, even though the business owner's substantial business skills and acumen are integral to the success of her business. By electing not to take a salary, that business owner's unpaid salary is an implicit business cost.

By foregoing a salary, the business owner is taking financial pressure off the company and boosting its chances for success at a critical stage (i.e., the launch of a business when money is tight and extra cash is critical).

Here, the business owner is making an implicit cost decision for the long-range health of her company.

In both examples, the landscaping company owner and the small business entrepreneur are leveraging opportunity costs in positive ways — they're making choices fully cognizant that the decisions they're making do have real-world consequences.

Yet the research, study, and due diligence they bring to their decision-making processes increase the lihood that they're making the right kind of opportunity cost decisions.

Opportunity Cost Examples

The examples of opportunity costs in business are fairly self-explanatory. Buying new machinery for your factory has a clear explicit cost. A small business owner declining an annual salary is a clear implicit cost. But what are some of the ways opportunity cost can pop up in and impact your individual life?

Opportunity costs start fairly early in life. What if you choose to go to college, or opt to learn a trade? Or, if you go to college, which major do you choose? And if you opt to learn a trade, what happens if you choose to be an electrician or if you decide to open a landscaping company?

Opportunity costs also impact your personal happiness. Ask anyone who's ever been divorced what their life would be if they didn't get married, or were married to someone else? Or, what if you decided to pass on buying your dream house because the timing wasn't right, and learned it increased significantly in value two years later?

In money and finance, opportunity cost can have a major impact on your life path.

Not saving for retirement until age 35 instead of starting at age 25 could mean hundreds of thousands of dollars less when you finally call it a career (which is a substantial opportunity cost). Or, passing on an Amazon.

com- stock in favor of a stock that never takes off could also alter your financial path in life, and thus also represents an opportunity cost.

Another way to consider opportunity costs is to consider how history would have changed if John Lennon and Paul McCartney decided not to start a rock and roll band, or if William Gates decided to go work for IBM instead of starting his own software company.

Certainly, both music and business would have changed dramatically if those scenarios had come to pass.

How to Calculate Opportunity Cost

While there is no hard and fast mathematical formula for figuring out opportunity costs, that doesn't mean you can't weigh considerations that could sway cost decisions in one direction or another.

In general, the formula for figuring out your opportunity costs is as follows:

Opportunity cost = What you are sacrificing / what you are gaining

Let's take a closer look at that equation:

By and large, opportunity costs are all about options — and weighing those options before choosing one alternative or another. The goal here is making a decision that leads to value, i.e., what am I getting sacrificing one outcome, be it financial or lifestyle-oriented, and what am I gaining making an opportunity cost decision?

In that equation, the formula for figuring out opportunity costs gain clarity. Essentially, opportunity costs are what's left over after measuring what business, financial or lifestyle outcomes you gain against any sacrifices you're making. Basically, you're evaluating the «value» ratio between two or more options to accurately gauge opportunity costs.

Think of opportunity cost calculations in these real-life terms.

Imagine if you're considering a career move, from a public relations staffer to a public relations freelance specialist. While salary isn't the only factor in that decision (being your own boss, less need to commute to work, and having the chance to work for multiple clients, are also big factors), money is a big driver of opportunity-cost decisions.

As a corporate, full-time public relations staffer with 10 years of experience in the field, you were making what amounts to $35 per hour. As a newly minted freelance P.R. specialist, your income will ly be lower as you start out — let's say $17.50 per hour.

At first glance, it appears you're taking a big pay cut — and you are. $17.50 is, after all, half your hourly income as a corporate employee. But opportunity cost isn't so easily measured that way.

The correct formula is to factor in sacrifice versus gain.

In this instance, you're giving up $2 as a public relations freelancer for every $1 you're earning as a public relations freelancer in opportunity costs, right the gate.

Yet the chances are good that you'll grow your business. That's because you're a smart, motivated and experienced P.R. professional who may well earn $70 per-hour running your own business within a year or two. In other words, the gain is worth the sacrifice.

And that's an opportunity cost consideration you need to make.

Three Key Factors of Opportunity Cost

Ultimately, any worthwhile formula for measuring opportunity costs weighs on three key factors: money, time and effort, otherwise known as «sweat equity.»

1. Money

With financial considerations to weigh, the key question to ask before making an opportunity cost decision is what else would you do with the money you're about to spend on a single decision? The landscaper who chooses to spend $3,000 on mowers will have the mowers, but will never get that specific $3,000 back. That $3,000 that could have been spent on part-time help during the busy season, or on a new and improved website, is the opportunity cost of choosing to buy the lawn mowers.

2. Time

Never forget that time is a commodity, too, just ball bearings and Barbie dolls. In the opportunity cost realm, time can be even more priceless than cash. Consequently, when making any big lifestyle decision, always factor in the time needed (or saved) by choosing a specific opportunity.

3. Effort/Sweat equity

If you choose to start your own business instead of climbing the corporate ladder, for example, factoring in the extra effort needed to make a start-up business work should be a priority. That extra effort, which could lead to a successful start-up company, could constitute an opportunity cost that is missed if you decide to stay on the corporate track.

Opportunity costs are rarely cut and dried, and impacts that are both positive and negative come into play. Consider these key factors:

The law of increased opportunity cost

When considering opportunity costs, it's tempting to think an accountant and weigh the cash you're spending (the sacrifice) against the cash you might be getting (the gain.)

But there are ancillary factors to consider, too. Take the law of increased opportunity cost, which can take place even if you don't spend a single dollar.

Think of a coffee shop owner who takes a staffer off the register and asks him to work stock shelves, and away from customers. That could impact short-term sales, as the worker isn't directly waiting on customers and pouring coffee.

But if the inventory isn't stocked, the business suffers, too, as customers have fewer options.

If you send more workers away from the register to stock shelves, however, the front of the store counter-help thins out, and you'll ly lose more customers and more sales. That simple decision to send a coffee shop staffer away from the register is a good example of the law of increasing opportunity cost.

Comparative advantage

In terms of opportunity costs, comparative advantage means a company or an economy is producing more goods or services at a leaner opportunity cost than competitors. An example of comparative advantage lowering your opportunity cost could include outsourcing part of your production to a country that provides better economic value for that service.

Sunk Costs

By definition, sunk costs are costs that were incurred in the past, and are unable to be recovered. In real-world terms, buying an expensive watch that you lose at the beach is a sunk cost.

A sunk cost is not always a bad thing for a business, and is sometimes simply inevitable; for example, replacing machinery in a factory means trying to scrap the old machinery. Anything that can't be scrapped is a sunk cost.

Relative to opportunity costs, sunk costs shouldn't factor into ongoing opportunity cost decisions, as they cannot be adjusted or changed.

Trade-offs

Trade-offs are the trigger for opportunity cost decisions.

For example, if you have $100 and you have to decide whether to buy a new winter coat or take your SUV in for an inspection and oil change, choosing one over the other leads to a trade-off, as you can't have both. If you choose the coat, the trade-off is that you can't get your vehicle in for servicing, which is your potential opportunity cost.

Risk

A risk isn't the same as opportunity cost. While risk is defined as the potential for a downside result from a business, financial, or lifestyle decision, the opportunity cost is defined as the gain that could have materialized from an alternate usage of the same resource (i.e., using the $100 to service your vehicle instead of buying a winter coat.)

Источник: https://www.thestreet.com/personal-finance/opportunity-cost-14648358

Opportunity Cost Formula | Step by Step Calculation

opportunity costs

Opportunity Cost is the cost of the next best alternative, forgiven. When a business must decide among alternate options, they will choose the one that provides them the greatest return.

Frankly speaking, there is no such specifically agreed or defined on a mathematical formula for the calculation of opportunity cost, but there are certain ways to think about those opportunity costs in a mathematical way, and the below formula is one of them.

However, this value may or may not always be measured in terms of money. Value can also be measured by other techniques, for example, satisfaction or time.

One relative formula for the calculation of opportunity cost could be  –

If we think about the cost of opportunity this, then the equation is very easy to understand, and it’s straightforward.

Example #1 – Reliance JIO

Reliance Jio Infocomm Ltd (known as Jio), a mobile network operator in India that is owned by Reliance Industries, which is headquartered in Mumbai.

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The service that was launched for all users on 5th September 2016 with a ‘Welcome Offer,’ was originally introduced in beta version for the employees of Reliance only on December 27, 2015, to mark the eighty-third birth anniversary of Dhirubhai Ambani, who was the founder of Reliance Industries.

The introductory offer lured many Indian customers, and it was able to manage to get 72 million prime customers within the first three months of its launch, but later, the company decided to extend its freebies for another three months when it had another option of actually charging the customer and earn revenue and hence it chose to forgive it’s another best alternate for not choosing to bill their customers for the services.

Reliance Jio Infocomm actually missed out on an $800 million (which is Rs 5,400 crore) revenue opportunity as mentioned above by offering an additional three months freebies, i.e., free services to its 72 million Prime customers who were actually ready to pay them from 1st of April.

Example #2 – Paytm Investment Opp

Paytm is an Indian e-commerce digital wallet and payment system company, based NOIDA S.E.Z in India.

Paytm is available ten Indian languages, and it offers online use-cases utility bill payments, travel, movies, mobile recharges, and events bookings as well as in-store payments at the grocery stores, vegetables and fruits shops, restaurants, pharmacies, parking, tolls, and education institutions with the QR code of Paytm Paytm, which is presently also loss-making company and which has yet to prove its mettle when it comes to the business model and providing the long-term sustainable product.

Berkshire a globally renowned firm that has a market capitalization of around $500 Billion. its past record, it is also known for one of the most astute and sharpest investors in the world. Berkshire decided to pick up a 3 to 4% stake in payments major with Rs 2,500 crore (around $356 million) that was made.

The question now arises as to why and what led Berkshire to invest in Paytm, whose losses stood at Rs 900 crore, whereas it’s coming to its revenue it was around Rs 829 crore, and in the year prior, its loss figure had touched Rs 1,497 crore? What is its expectation with that investment?

Berkshire was aware of the financial opportunity which was available in the Indian market that it had to offer. It would not to miss it. So here, the opportunity cost for Berkshire will be Rs 2500 crore as easily it could have chosen any other listed company with a profit-making company.

Opportunity Cost Calculator

You can use the following Opportunity Cost Calculator.

Opportunity Cost Formula =Return of Next Best Alternative Not Chosen – The Return of the Option Chosen
0 – 0 =0

Interpretation

  • Opportunity cost is the value of something when a certain course of action is chosen. The benefit or value that was given up can refer to decisions in your personal life, in an organization, in the country or the economy, or in the environment, or on the governmental level.
  • These kinds of decisions will typically involve constraints time, social norms, resources, rules, and physical realities.
  • An investor goes completely to cash when he decides that the market is overvalued. This will dramatically reduce their risk at the cost of opportunity of the potential returns that are being invested.
  • Another example where student considers the cost of 4-year university education by calculating total hostel, tuition, and other expenses for the period. They could also include the cost of the opportunity of missing 4-years of salary in their calculations.
  • A headphone manufacturer facing healthy competition from low-cost products with similar designs of their own. They can decide to increase the quality of their build (for e.g., Apple) to make the competition look and feel comparatively cheap. The opportunity cost of the new design of the product will be the increased cost and its inability to compete on price.
  • Opportunity costs are truly everywhere, and they occur with every decision we make, whether it’s big or small.

Opportunity Cost Calculation in Excel

Let us now do the same Opportunity Cost example in Excel. This is very simple. You need to provide the two inputs of return of the next best alternative not chosen and return of the option chosen. You can easily calculate the ratio in the template provided.

The opportunity cost will be –

This has been a guide to Opportunity Cost Formula. Here we learn how to calculate opportunity cost using its formula along with some practical industry examples, a calculator, and a downloadable excel template. You can learn more about Excel Modeling from the following articles –

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Источник: https://www.wallstreetmojo.com/opportunity-cost-formula/

Альтернативные издержки: что такое, как рассчитать

opportunity costs

Последнее обновление: 16.01.2020

Альтернативные издержки – оценка потерь при существующих возможностях. Данный термин чаще всего используется в экономике. Для расчета берутся специальные математические формулы.

Что такое альтернативные издержки?

Стоимость возможности связана с тем, сколько компаниям стоит производить товары или услуги с точки зрения того, что можно было бы заработать, используя эти же ресурсы для производства различных товаров или услуг.

По сути, альтернативные издержки сводятся к сравнению одного варианта производства с другим вариантом производства.

Это включает в себя определение стоимости, полученной от одного перехода с производством одного варианта, в сравнении с тем, что можно было бы получить, выбрав другой вариант с использованием одного и того же сырья.

Принцип расчета альтернативных издержек

Что такое альтернативные издержки, можно понять, рассматривая различные продукты, которые можно изготовить из одних и тех же базовых материалов. Кукуруза является распространенным продуктом питания.

Кукуруза может быть переработана и продана в банках, или подготовлена немного другим способом и продана в замороженных упаковках. Кроме того, кукуруза может быть измельчена в еду и упакована в запечатанные мешки.

Продавец хотел бы изучить относительные преимущества производства каждого типа продукта из одного и того же товара и сравнить затраты, связанные с выбором одной линии производства или возможности из двух других.

При расчете реальной альтернативной стоимости важно учитывать несколько аспектов экономики. Во-первых, есть стоимость производства, связанная с каждым вариантом производства. Во-вторых, существует вопрос стоимости хранения, пока готовая продукция ожидает продажи.

Наконец, существует нехватка сырья и влияние доступности на конечную и реальную стоимость материалов.

В то время как другие факторы также применимы, любой экономист будет учитывать эти три фактора при оценке упущенной продукции, выбирая один тип производства вместо другого.

Стоимость возможности может применяться ко многим различным ситуациям. Используемые материалы могут включать землю, рабочую силу, оборотный капитал или любой вид продовольственного товара, включая говядину или рыбу.

Как правило, идея расчета альтернативных издержек состоит в том, чтобы предоставить руководящие принципы для наиболее эффективного использования материалов, чтобы наибольшее количество прибыли возвращалось предприятием.

Концепция альтернативных издержек

Для подобной процедуры применяется формула подсчета альтернативных издержек, и причем не одна. То, что понимается под необходимыми альтернативными затратами, также следует принимать во внимание. Данным термином определяются издержки производства.

Виды альтернативных издержек

Специалисты выделяют несколько видов альтернативных издержек (затрат).

Явные альтернативные издержки

Бизнес-расходы, которые легко идентифицировать и учесть. Явные затраты представляют собой явные, очевидные оттоки от бизнеса, которые снижают его рентабельность. Это контрастирует с менее ощутимыми расходами, такими как амортизация гудвилла, которые не так однозначны с точки зрения их влияния на конечную стоимость бизнеса.

Хорошими примерами явных затрат могут быть такие статьи, как расходы на заработную плату, расходы на аренду или аренду, а также стоимость материалов, которые идут на производство товаров. С этими расходами легко увидеть источник оттока денежных средств и деловые операции, к которым относятся расходы.

Скрытые альтернативные издержки

Скрытые издержки (затраты) также называют неявными. Они обозначают только те ресурсы, которыми владеет компания. Это:

  1. Денежные платежи, которые компания могла бы владеть при использовании собственных возможностей.
  2. Нормальная прибыль.

Явные и неявные альтернативные издержки в совокупности создают экономические издержки.

Как рассчитать альтернативные издержки?

Как найти альтернативные издержки, поможет формула:

стоимость возможности = стоимость выбранной альтернативы – стоимость следующей лучшей альтернативы

Применяемые формулы

Для исчисления альтернативных издержек используется формула расчета, применяемая на производстве.

Пример: Сотруднику компании в настоящее время нужно купить хотя бы 1 из 3 товаров – формальную юбку (500 рублей), пару сережек (70 рублей) и сумку из лакированной кожи (650 рублей) – но у нее недостаточно денег, чтобы купить все 3.

После долгих раздумий сотрудница решает отказаться от сережек и кошелька и купить юбку, хотя тоже хотела сережки. Можно узнать ее альтернативную цену, если сотрудница купит юбку.

Решение: Количество экономических альтернатив = 3 (юбка за 500 рублей, серьги за 70 рублей и кошелек за 650 рублей)

Желаемая альтернатива = 500 руб. (юбка)

Следующая лучшая альтернатива = 70 руб. (серьги)

Теперь, применяя вышеупомянутую формулу альтернативной стоимости:

Стоимость возможности = 500 – 70 = 430

Это объясняет, как генерировать цифру альтернативных издержек достаточно ясно, и исправляет любые сомнения относительно численного представления этой концепции. Эта концепция, а также метод достижения математической фигуры для нее довольно просты. Как только логика, окружающая его, становится ясной, постижение ее сущности едва ли требует усилий.

Формула (нахождение неизвестного)

Закон увеличения альтернативных издержек

Закон возрастания альтернативных затрат (издержек) – это концепция, которая часто используется в деловых и экономических кругах. По сути, этот закон гласит, что по мере производства дополнительных единиц товара издержки, связанные с этим производством, также будут увеличиваться.

Понимание этого феномена может помочь предприятиям определить, стоит ли выбирать увеличение производства, или же увеличение альтернативных издержек означает, что выгоды от этого уменьшаются в достаточной степени, чтобы обеспечить поддержание производства на более низком уровне.

Чтобы понять этот закон, важно сначала определить, что подразумевается под самой альтернативной стоимостью.

Это иногда называют предрешенным производством, что означает, что для выбора одной стратегии или метода производства товара необходимо отвлечь ресурсы от производства других товаров.

Возможные издержки отражают то, что можно было бы получить, используя эти ресурсы другим способом, и то, как это использование сравнивается с выгодами, которые в конечном итоге дает выбранный вариант.

Схема обозначения альтернативных издержек

1 из способов понять, как действует закон увеличения альтернативных издержек, – рассмотреть фермера, который решает, как распределить плантации сельхозугодий для роста 2 культур. Вместо того, чтобы распределять имеющиеся земли поровну между двумя культурами, фермеры предпочитают высаживать 70% земли под кукурузу, а оставшуюся часть оставляют для соевых бобов.

Даже несмотря на то, что производство кукурузы увеличивается благодаря выделению дополнительных ресурсов для этих усилий, это может привести к росту затрат на производство соевых бобов на уменьшенном количестве земли вследствие сокращения прибыли на предприятии, которое включает в себя ряд фиксированных расходов.

На этом этапе фермеру необходимо будет определить, компенсирует ли выгода от увеличения количества кукурузы возросшие затраты на выращивание меньшего количества соевых бобов, а затем скорректировать распределение ресурсов по мере необходимости для достижения наиболее желаемого результата.

Кривая трансформации может применяться в разных сферах

Важно! Общая концепция может быть использована несколькими способами. Предприятия могут использовать ее при планировании квот на производство различных продуктов.

Отделы могут использовать эту идею при распределении ресурсов между различными проектами.

Даже малые предприятия могут принимать во внимание закон об увеличении альтернативных издержек при проектировании дисплеев и планировки торгового района магазина или при распределении времени на определенные виды функций бэк-офиса.

Имея в виду эту концепцию, зачастую гораздо легче прийти к плану действий, который предусматривает достижение максимальной выгоды при одновременном контроле потерь.

Использование теории альтернативных издержек

Примеры применения альтернативных издержек помогут лучше усвоить и осознать сведения экономического характера.

Пример 1

На изображении видно, как именно ведется запись издержек. Цифровые обозначения всегда заносят в правую колонку напротив наименования.

Пример 2

В следующем примере видно, каким образом ведется поиск решения с помощью математических расчетов.

Альтернативные издержки можно считать важной информацией при подсчете упущенной выгоды. Специалисты не советуют использовать неэффективные формулы. Это может повлечь за собой неточность данных.

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Источник: https://urist-bogatyr.ru/article-item/alternativnye-izderzhki/

Opportunity Cost — Learn How to Calculate & Use Opportunity Cost

opportunity costs

Opportunity cost is one of the key concepts in the study of economicsEconomicsCFI's Economics Articles are designed as self-study guides to learn economics at your own pace.

Browse hundreds of articles on economics and the most important concepts such as the business cycle, GDP formula, consumer surplus, economies of scale, economic value added, supply and demand, equilibrium, and more and is prevalent throughout various decision-making processes.

The opportunity cost is the value of the next best alternative foregone. In simplified terms, it is the cost of what else one could have chosen to do.

Considering Alternative Decisions

Principles of management accountingFinancial Accounting TheoryFinancial Accounting Theory explains the «why» behind accounting — the reasons why transactions are reported in certain ways.

This guide will help you understand the main principles behind Financial Accounting Theory or corporate finance Corporate Finance OverviewCorporate finance deals with the capital structure of a corporation, including its funding and the actions that management takes to increase the value ofdictate that opportunity costs arise in the presence of a choice. If there appears to be only one option presented in the decision-making process, the default alternative is laissez-faire (to do nothing) with an associated cost of zero. However, if a decision maker must choose between Decision A or B, the opportunity cost of Decision A is the net benefit of Decision B and vice versa.

How is Opportunity Cost Calculated?

In financial analysis, the opportunity cost is factored into the present when calculating the Net Present Value formulaNPV FormulaA guide to the NPV formula in Excel when performing financial analysis.

It's important to understand exactly how the NPV formula works in Excel and the math behind it.

NPV = F / [ (1 + r)n ] where, PV = Present Value, F = Future payment (cash flow), r = Discount rate, n = the number of periods in the future.

Where:

NPV: Net Present Value

FCF: Free cash flow

r: Discount rate

n: Number of periods

When presented with mutually exclusive options, the decision-making rule is to choose the project with the highest NPV.

However, if the alternative project gives a single and immediate benefit, the opportunity costs can be added to the total costs incurred in C0.

As a result, the decision rule then changes from choosing the project with the highest NPV into undertaking the project if NPV is greater than zero.

Financial analysts use financial modelingWhat is Financial ModelingFinancial modeling is performed in Excel to forecast a company's financial performance. Overview of what is financial modeling, how & why to build a model. to evaluate the opportunity cost of alternative investments.

  By building a DCF modelDCF Model Training Free GuideA DCF model is a specific type of financial model used to value a business.

The model is simply a forecast of a company’s unlevered free cash flow in Excel, the analyst is able to compare different projects and assess which is most attractive.

Application of Opportunity Cost

For example, assume a firm discovered oil in one of its lands. A land surveyor determines that the land can be sold at a price of $40 billion.

A consultant determines that extracting the oil will generate an operating revenue of $80 billion in present value terms if the firm is willing to invest $30 billion today.

The accounting profit would be to invest the $30 billion to receive $80 billion, hence leading to an accounting profit of $50 billion. However, the economic profit for choosing to extract will be $10 billion because the opportunity cost of not selling the land will be $40 billion.

Other Costs in Decision-Making: Incremental Costs

A firm may choose to sell a product in its current state or process it further in hopes of generating additional revenue. For example, crude oil can be sold at $40.73 per barrel.

Kerosene, a product of refining crude, would sell for $55.47 per kilolitre.

While the price of kerosene is more attractive than crude, the firm must determine its profitability by considering the incremental costs required to refine crude oil into kerosene.

In this example, the firm will be indifferent to selling its product in either raw or processed form. However, if the distillation cost is less than $14.74 per barrel, the firm will profit from selling the processed product. If not, it would be better to sell the product in its raw form.

Other Costs in Decision-Making: Sunk Cost

A sunk cost is a cost that has occurred and cannot be changed by present or future decisions. As such, it is important that this cost is ignored in the decision-making process.

For instance, assume that the firm described above has invested $30 billion to start its operations. However, a fall in demand for oil products has led to a foreseeable revenue of $50 billion. As such, the profit from this project will lead to a net value of $20 billion. Alternatively, the firm can still sell the land for $40 billion.

The decision in this situation would be to continue production as the $50 billion in expected revenue is still greater than the $40 billion received from selling the land. The $30 billion initial investment has already been made and will not be altered in either choice.

Other Resources

To learn more and continue advancing your career, see the following free CFI resources:

  • Cost Behavior AnalysisCost Behavior AnalysisCost behavior analysis refers to management’s attempt to understand how operating costs change in relation to a change in an organization’s level of activity. These costs may include direct materials, direct labor, and overhead costs that are incurred from developing a product.
  • Activity-Based CostingActivity-Based CostingActivity-based costing is a more specific way of allocating overhead costs “activities” that actually contribute to overhead costs. An activity is
  • WACC FormulaWACCWACC is a firm’s Weighted Average Cost of Capital and represents its blended cost of capital including equity and debt. The WACC formula  is = (E/V x Re) + ((D/V x Rd)  x  (1-T)). This guide will provide an overview of what it is, why its used, how to calculate it, and also provides a downloadable WACC calculator
  • Types of Financial ModelsTypes of Financial ModelsThe most common types of financial models include: 3 statement model, DCF model, M&A model, LBO model, budget model. Discover the top 10 types

Источник: https://corporatefinanceinstitute.com/resources/knowledge/economics/opportunity-cost/

Opportunity Cost Formula | Calculator (Excel template)

opportunity costs

Opportunity cost can be termed as the next best alternative of a particular option which has been executed or about to execute. It can be a project foreign investment or a particular option taken by a group of people or an individual for personal purpose or for a business purpose. It is a hypothetical assumption and often measured to get the value of the actual decision made.

The Formula for Opportunity Cost is:

Opportunity Cost = Total Revenue – Economic Profit

Opportunity Cost = What One Sacrifice / What One Gain

Let’s take an example to understand the calculation of Opportunity Cost formula in a better manner.

Opportunity Cost Formula – Example #1

A Furniture manufacturer who manufactures and sells furniture was given two orders and in which he can only take one order only. Now it’s up to the Furniture manufacturer to decide between the two orders as he has time and labor limitations. The manufacturer has to pay wages @ INR 100/hour to the labor.

  • 1st order: One table Selling Price INR 7500, the time required- 16Hours, Raw material costs- INR 1800
  • 2nd Order: Two Chairs Selling Price INR 4000 each, Time required – 11 hours each, Raw material costs – INR 800 each.

Find out the better option and the opportunity costs he misses?

Solution:

As the manufacturer has two different orders with diversified characteristics, so we have to calculate the profit from both of the orders individually

Profit from the First Order

Opportunity Cost = Total Revenue – Economic Profit

  • First Order = INR 7500 – [(16 * 100) + 1800]
  • First Order = INR (7500 – 3400)
  • First Order = INR 4100

Profit from the Second Order

  • Second Order = INR (4000 * 2) – [(11 * 2 * 100)+ (800 * 2)]
  • Second Order = INR 8000 – 3800
  • Second Order = INR 4200

Conclusion – The manufacturer will take order no. 2 as it will give him much more earnings (INR 4200 vs INR 4100)

Thus the Opportunity cost is INR 4100 which the manufacturer misses during his course of business. As the manufacturer has time limitations and he can take only one order at a time, so he would opt for the second order.

Opportunity Cost Formula – Example #2

Tata Motors have three bulk orders and it can take the most profitable one first as to strengthen its Cash Flow so has to enhance its working capital to process the rest of the two orders. Find out the most profitable and the least profitable in a descending manner in order to protect its Cash balance. (Assume that all the Sales are made on a Cash basis).

  • Order 1: 100 Cars of Selling Price of INR 4.5 lakh each, RM costs – INR 80 lakhs, Total Labor expenses – INR 22 lakhs
  • Order 2: 50 Cars of Selling Price of INR 8 lakh each, RM costs – INR 95 lakhs, Total Labor expenses – INR 45 lakhs
  • Order 3: 20 Trucks of Selling Price of INR 22 lakh each, RM costs – INR 1.12 Cr, Total Labor expenses – INR 38 lakhs

Solution:

From the above problem, we should calculate the profitability in each case. As we all know the Sales are done in a Cash basis, so more earnings would help the business to generate higher cash flow and there would not be pressure on the Working capital as the company will borrow less short term borrowings.

Profitability from First Order

  • First Order = INR [(4, 50,000 * 100) – (80,00,000 + 22,00,000)]
  • First Order = INR 4,50,00,000 – 1,02,00,000
  • First Order = INR 3,48,00,000

Profitability from Second Order

  • Second Order = INR [(8,00,000 * 50) – (95,00,000 + 45,00,000)]
  • Second Order = INR (4,00,00,000 – 1,40,00,000)
  • Second Order= INR 2,60,00,000

Profitability from Third Order

  • Third Order = INR [(22,00,000 * 20) – (1,12,00,000 + 38,00,000)]
  • Third Order = INR 4,40,00,000 – 1,50,00,000
  • Third Order = INR 2, 90,00,000

Thus Tata Motors will undertake the First order First , then it will take the Third order and lastly it will take the second order in order of profitability so as to strengthen its working capital.

Thus the opportunity costs after the First order is done would be = INR (2.9 +2.6) Cr or INR 5.

5 Cr (as the company has not executed the other orders and it might choose not to execute) and after the second order the opportunity costs would be INR 2.6 cr.

Opportunity Cost Formula – Example #3

Larsen and Tubro Ltd has two order for execution, But it can undertake only one. the following data choose which one to operate and the opportunity costs.

  • Order one will derive a Revenue of INR 10,00,000 and Costs 4,00,000.
  • Order two will derive a Revenue worth INR 12,00,000 and will cost INR 8,00,000.

Solution:

Profitability from First Order

  • First Order = INR 10,00,000 – 4,00,000
  • First Order = INR 6,00,000

Profitability from Second Order

  • Second Order = INR 12,00,000 – 8,00,000
  • Second Order = INR 4,00,000

Thus L&T will take order one and the Opportunity costs of not taking second order would be INR 400000.

Explanation of Opportunity Cost Formula

The formula calculates the best options and calculates the second best possible option in terms of value which was not chosen during the course of production.

Relevance and Uses of Opportunity Cost Formula

  • Assessing relative prices of commodities

The concept is very much used for measuring the prices or the value of different communities which are used in a manufacturing concern.

For example, according to the theory of economics, we know that the goods are scarce and human wants are unlimited. So a particular commodity or raw material can be used for one purpose only. So the best possible end product has to decide by the authority which can serve human wants in a better way.

  • Deciding Salary or remuneration of professionals

Opportunity cost could be used during the fixation of salary for a particular job. When a benchmark is created based upon the remuneration of that particular professional when he or she might be offer for another job. The suspect the capability and the productive names of professionals, one can use opportunity cost as a benchmark of remuneration.

Proper allocation of scarce resources

As we all know the resources are scarce so to get optimum value or efficiency one has to decide the best possible use of resources which would give the best satisfaction to the end consumer. In other words, one has to process the raw materials into doors kind of products which would give optimum satisfaction to the user.

For example, if a piece of wood can be used to make one table or three chairs then the best possible outcome should be chosen which would help a number of people.

Opportunity Cost Formula Calculator

You can use the following Opportunity Cost Calculator

Opportunity Cost Formula =Total Revenue – Economic Profit
=0 – 0
=0

Opportunity Cost Formula in Excel (With Excel Template)

Here we will do the same example of the Opportunity Cost formula in Excel. It is very easy and simple.

You can easily calculate the Opportunity Cost using Formula in the template provided.

Profitability from First Order is calculated using Opportunity Cost Formula

Profitability from the Second Order is calculated using the Opportunity Cost Formula

This has been a guide to Opportunity Cost formula. Here we discuss How to Calculate Opportunity Cost along with practical examples. We also provide an Opportunity Cost Calculator with downloadable excel template. You may also look at the following articles to learn more –

Источник: https://www.educba.com/opportunity-cost-formula/

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