opportunity cost

Definition

The cost of passing up the next best choice when making a decision. For example, if an asset such as capital is used for one purpose, the opportunity cost is the value of the next best purpose the asset could have been used for. Opportunity cost analysis is an important part of a company's decision-making processes, but is not treated as an actual cost in any financial statement.

Use opportunity cost in a sentence

An investor must decide all the time if the opportunity cost of one investment is greater than the investment presented to him.

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The CEO was tied up shaking hands at the benefit. He needed to be talking to the senator. The CEO understood the opportunity cost associated with PR.

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The company could spend their allocated budget on either creating a mobile application or updating their website; in order to decide which one, they must weigh the opportunity cost of not choosing the other.

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