# Project Selection – Opportunity Cost

## Definition

Opportunity Cost is the highest value a person needs to give up for the selected choice.

For example, if you have US \$10, you can either buy a coffee or an apple pie. When you buy the apple pie, your opportunity cost is coffee.

There is no calculation required for getting the opportunity cost.

## Sample Question

You need to select one of the three proposed projects. However, owing to the limitation of capital, only one project can be chosen. Project A would have a NPV of US\$100,000, Project B would have a NPV of US\$120,000 while Project C would have a NPV of US\$50,000. What is the opportunity cost of choosing the project with the highest NPV?

A. US\$120,000
B. US\$50,000
C. US\$100,000
D. US\$150,000

Solution: C

## Note

Do note that Opportunity Cost is simply the highest value of the project not being selected. No addition, subtraction required!

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### One Comment on “Project Selection – Opportunity Cost”

1. SHASHI SHEKHAR says:

Option D. US\$150,000 is ir-relavent in the question. Project B has NPV of US\$120,000. So Project A would have a NPV of US\$100,000 will be the oppurtunity Cost