Resource with a current alternative use

The general framework for analyzing opportunity costs begins by asking the question " Is there any other use for this resource right now?" For many resources, there will be an alternative use if the project being analyzed is not taken.

• The resource might be rented out, in which case the rental revenue is the opportunity lost by taking this project. For example, if the project is considering the use of a vacant building owned by the business already, the potential revenue from renting out this building to an outsider will be the opportunity cost.

• The resource could be sold, in which case the sales price, net of any tax liability and lost depreciation tax benefits, would be the opportunity cost from taking this project.

• The resource might be used elsewhere in the firm in which case the cost of replacing the resource is considered the opportunity cost. Thus, the transfer of experienced employees from established divisions to a new project creates a cost to these divisions, which has to be factored into the decision making.

Sometimes, decision makers have to decide whether the opportunity cost will be estimated based on the lost rental revenue, the foregone sales price or the cost of replacing the resource. When such a choice has to be made, it is the highest of the costs -- that is, the best alternative foregone — that should be considered as an opportunity cost.

Retirement Planning For The Golden Years

Retirement Planning For The Golden Years

If mutual funds seem boring to you, there are other higher risk investment opportunities in the form of stocks. I seriously recommend studying the market carefully and completely before making the leap into stock trading but this can be quite the short-term quick profit rush that you are looking for if you am willing to risk your retirement investment for the sake of increasing your net worth. If you do choose to invest in the stock market please take the time to learn the proper procedures, the risks, and the process before diving in. If you have a financial planner and you definitely should then he or she may prove to be an exceptional resource when it comes to the practice of 'playing' the stock market.

Get My Free Ebook

Post a comment