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.

Stocks and Shares Retirement Rescue

Stocks and Shares Retirement Rescue

Get All The Support And Guidance You Need To Be A Success At Investing In Stocks And Shares. This Book Is One Of The Most Valuable Resources In The World When It Comes To

Get My Free Ebook

Post a comment