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mario050
Pridružen/-a: 12.04. 2022, 13:05
Prispevkov: 45
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 Objavljeno: 21 Apr 2022 04:21 Naslov sporočila: Understand What Is Opportunity Cost Before You Regret |
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What Is Opportunity Cost?
Individuals, investors, or businesses lose out on potential benefits when they choose one alternative over another. Since they cannot be seen, opportunity costs are easy to overlook. The ability to understand the opportunities foregone by choosing one investment over another allows for better decision-making.
A few key takeaways
Opportunity costs result from the forgone benefits of an option that was not chosen.
If opportunity costs are to be properly evaluated, all options must be considered and weighed against each other.
When individuals and organizations consider opportunity costs, they are able to make more profitable decisions.
Formula and Calculation of Opportunity Cost
Opportunity Cost=FO−COwhere:FO=Return on best foregone optionCO=Return on chosen option\begin{aligned} &\text{Opportunity Cost}=\text{FO}-\text{CO}\\ &\textbf{where:}\\ &\text{FO}=\text{Return on best foregone option}\\ &\text{CO}=\text{Return on chosen option} \end{aligned}
Opportunity costs are calculated by subtracting the expected return of each option from the total. Let’s assume that you choose option A-to to invest in stocks in order to generate capital gains. Meanwhile, Option B involves reinvesting a portion of your sales into your business in preparation for your new equipment to increase production efficiency, which will result in lower operating costs and a larger profit margin.
Take the example of an expected return of 12% on investments made in the stock market over the next year and a return of 10% on equipment updates. (12% – 10%) equals two percentage points if you choose the equipment over the stock market. In other words, if you invest in the business, you won’t earn a higher return.
Financial reports do not include opportunity costs, however, business owners often use the concept to make educated decisions when faced with multiple options. As an example, bottlenecks often result from opportunity costs.
Understand What Is Opportunity Cost
source: theboomoney |
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