What is an opportunity cost?

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The value as to what you lose when you have to choose between 2 or even more alternatives is known as opportunity cost. Whenever you make a decision, you believe that the outcome will be beneficial for you, regardless of what you lose by doing so.

As an investor, opportunity cost refers to the fact that your investment decisions will always result in current and future losses or gains. Although opportunity cost isn’t an exact measure, one method to assess it is to compare the value of the option you made instead of the value of the future value you didn’t get.

When it comes to evaluating a company’s capital structure, opportunity cost analysis is essential. When a company issues debt or equity capital, it incurs a cost to compensate shareholders and lenders for the risk of investment, but it also has an opportunity cost.

Loan payments, for example, can’t be invested in stocks or bonds, which give the possibility of earning an investment return. The firm must evaluate whether expanding through debt leverage will yield more profits than it might through investing.

Opportunity cost is still an important factor to consider when making a decision, but it’s not accurate until you’ve made your decision and can compare the results of the two investments. While the concept of opportunity cost is applicable to any action, it gets more difficult to measure as more elements that cannot be quantified are considered.

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Pieter Borremans
By Pieter Borremans

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