Increase in Salary





After-tax expense





Present Value





The cumulated present value of the costs is $31,046.

Turning to the second resource — the storage space originally used for the financial record — if this project is taken, the opportunity cost is the cost of the bank vault.

Additional Storage Expenses per year = $1,000

After-tax Additional Storage Expenditure per year = $1,000 (1 - 0.40) = $ 600 PV of After-tax Storage Expenditures for 4 years = $ 600 * PV (A, 22.76%,4 years)

The opportunity costs estimated for the general manager's added workload ($ 31,046) and the storage space ($1,475) are in present value terms and can be added on to <$38,893> that we computed as the net present value of Bookscape Online in illustration 5.11.The net present value becomes more negative.

Net present value with opportunity costs = NPV without opportunity costs + Present value of opportunity costs = -$38.893 - $31,046 - $1,475= - $71,774

The cash flows associated with the opportunity costs could alternatively have been reflected in the years in which they occur. Thus, the additional salary and storage expenses could have been added to the operating expenses of the store in each of the 4 years. As table 6.7 indicates, this approach would yield the same net present value and would have clearly been the appropriate approach if the internal rate of return were to be calculated.

Table 6.7: Net Present Value with Opportunity Costs - Alternate Approach


Cashflow with opportunity costs

Present Value

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Lessons From The Intelligent Investor

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