Opportunity Cost Of Capital Definition. The opportunity cost of capital is the difference between the returns on the two projects. The investor s opportunity cost represents the cost of a foregone alternative.
Example of the opportunity cost of capital for example the senior management of a business expects to earn 8 on a long term 10 000 000 investment in a new manufacturing facility or it can invest the cash in stocks for which the expected long term return is 12. The opportunity cost of capital is the difference between the returns on the two projects. For investors the cost of capital is the opportunity cost of making a specific investment as well as the rate of return that can be earned by putting money into an investment.
Expected return that is forgone by investing in a project rather than in comparable financial securities.
The cost of capital concept is also widely used in economics and accounting. Example of the opportunity cost of capital for example the senior management of a business expects to earn 8 on a long term 10 000 000 investment in a new manufacturing facility or it can invest the cash in stocks for which the expected long term return is 12. Shareholders can the invest in a financial asset of similar risk to the investment project the firm forgoes. The opportunity cost of capital is the difference between the returns on the two projects.
