Use the Opportunity Cost Calculator to quickly determine the theoretical loss of choosing one option over its best alternative. This calculation helps in making better investment, business, and personal decisions by quantifying trade-offs.
Opportunity Cost Calculator
Opportunity Cost:
$0.00Opportunity Cost Formula
$$ \text{Opportunity Cost} = (\text{Benefit}_{\text{Foregone}} – \text{Cost}_{\text{Foregone}}) – (\text{Benefit}_{\text{Chosen}} – \text{Cost}_{\text{Chosen}}) $$
or simplified:
$$ \text{Opportunity Cost} = \text{Net Benefit}_{\text{Foregone}} – \text{Net Benefit}_{\text{Chosen}} $$
Source: Investopedia | Khan Academy
Variables
The Opportunity Cost Calculator requires four core inputs to determine the value foregone by making an alternative choice:
- Benefit/Return of Foregone Option: The profit, gain, or utility you would have received from the option you chose NOT to pursue.
- Cost/Investment of Foregone Option: The direct expenditure, time, or capital required for the foregone option.
- Benefit/Return of Chosen Option: The actual profit, gain, or utility received from the option you selected.
- Cost/Investment of Chosen Option: The actual direct expenditure, time, or capital required for the chosen option.
Related Calculators
Explore these other essential financial and business calculators:
- Annualized Return Calculator
- Break-Even Point Calculator
- Future Value Calculator
- Discounted Cash Flow Calculator
What is Opportunity Cost?
Opportunity cost represents the potential benefits an individual, investor, or business misses out on when choosing one alternative over another. It is a fundamental concept in economics and finance. Because resources (money, time, labor) are scarce, every decision involves a trade-off. By quantifying the opportunity cost, decision-makers gain a clearer picture of whether their chosen path truly offers the best net value.
Unlike explicit costs (which are documented expenditures), opportunity cost is an implicit cost. It forces you to look beyond the immediate profit of your chosen option and evaluate the value of the alternative. For instance, if a company invests $1 million in a new product line (chosen option) instead of upgrading its existing software infrastructure (foregone option), the opportunity cost is the value the software upgrade would have provided (e.g., efficiency gains, lower maintenance costs).
How to Calculate Opportunity Cost (Example)
Consider a scenario where an investor, Jane, has $10,000. She is deciding between two investments:
- Foregone Option (Stock Fund): Invests $10,000, expects a return of $1,500 after one year. (Net Benefit: $1,500)
- Chosen Option (Real Estate Fund): Invests $10,000, receives a return of $1,200 after one year. (Net Benefit: $1,200)
Here is the step-by-step calculation:
- Calculate the Net Benefit of the Foregone Option: $1,500 (Benefit) – $0 (Additional Cost beyond investment) = $1,500.
- Calculate the Net Benefit of the Chosen Option: $1,200 (Benefit) – $0 (Additional Cost beyond investment) = $1,200.
- Subtract the Chosen Net Benefit from the Foregone Net Benefit: $1,500 – $1,200 = $300.
- The Opportunity Cost of choosing the Real Estate Fund is $300. This means Jane lost the chance to make an extra $300 by choosing the less profitable alternative.
Frequently Asked Questions (FAQ)
What is the difference between explicit and implicit costs?
Explicit costs are direct, tangible, out-of-pocket expenses (like wages, rent, or utilities). Implicit costs, like opportunity cost, represent the value of the resource owner’s next best alternative use of money, time, or resources, and are not recorded as a formal expense.
Is Opportunity Cost always a positive number?
No. If the Net Benefit of your Chosen Option is higher than the Net Benefit of the Foregone Option, the resulting Opportunity Cost will be negative. A negative opportunity cost indicates that your decision was optimal from a financial perspective, and you didn’t give up a better financial outcome.
Why is opportunity cost important in business decisions?
It helps businesses allocate scarce capital efficiently. For example, a company must decide whether to invest capital in marketing, R&D, or debt reduction. Evaluating the opportunity cost (the benefits lost by not pursuing the other two options) is crucial for maximizing shareholder value.
How does time factor into opportunity cost?
Time is a non-renewable resource, and its value is a critical component of opportunity cost. If a business owner spends 40 hours developing a feature internally (chosen option), the opportunity cost includes the revenue they could have generated by spending those 40 hours on client acquisition (foregone option).