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Opportunity cost

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Dattprasad Bhaskar Vernekar Senior Manager Bengaluru, Karnataka, India
Selecting projects. opportunity cost when there are two projects is known.
Project A : $X, Project B : $Y. Considering $X $ $Y, opportunity cost is $X.

Consider selection between four project.
Project A : $Z, Project B : $Y, Project C : $X, Project D : $W
$X = $W and is smallest among ($Z and $Y). What is the opportunity cost.

If $X= $Y = $Z = $W, What is opportunity cost. And which project to be selected.
Which is the immediate parameter with high priority considered when selecting a project.
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Anonymous
Opportunity Cost among 4 Projects is $X
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Anonymous
Opportunity Cost = 0
Next parameter would be the Cost of the Project
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Anonymous
Don't know
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Anonymous
Cost of the Project is the next most imp criteria
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Kavitha Gunasekaran Project Manager| Aerospace & Defence Organisation Chennai, Tamil Nadu, India
Opportunity cost is not the only parameter to choose a project. We have several other factors to consider a well such as NPV, IRR, cost benefit ratio for selection of projects.

Opportunity cost is the potential return of the second best option that was not selected. It is not the sum of all potential returns that were not selected.

In the example you have cited, if project C with potential return of $X is selected over Project B (considering the second best option after analysing other data available such as NPV), the opportunity cost will be $Y, potential return of Project B.
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Dattprasad Bhaskar Vernekar Senior Manager Bengaluru, Karnataka, India
Thanks kavitha for the detailed explanation.
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1 reply by Kavitha Gunasekaran
Jun 04, 2018 10:50 AM
Kavitha Gunasekaran
...
It is my pleasure sharing the info Bhaskar.
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Dattprasad Bhaskar Vernekar Senior Manager Bengaluru, Karnataka, India
Consider we are in a stage of project selection.
Project A : NPV = 10, IRR = 5, PAYBACK PERIOD = 10 MONTHS
Project B : NPV = 8, IRR = 4, PAYBACK PERIOD = 6 MONTHS

GOING with the concept while choosing project,
Payback period should be less
NPV should be more
IRR should be more

In this example project A has higher value of NPV and IRR, but project B has lower value of payback period. If NPV or IRR is the parameter for selecting project, project A can be easily choosen. If payback period is the parameter for selecting project, project B is choosen.
How to choose project when all three parameters are given.
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Kavitha Gunasekaran Project Manager| Aerospace & Defence Organisation Chennai, Tamil Nadu, India
The project with the best parameters of NPV and IRR to be chosen as payback period is not an overwhelming factor when compared to them. So, in the current case wherein all three parameters are given as above, Project A with higher NPV and IRR but with higher payback period compared to Project B has to be chosen over Project B.
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Kavitha Gunasekaran Project Manager| Aerospace & Defence Organisation Chennai, Tamil Nadu, India
Jun 03, 2018 12:27 PM
Replying to Dattprasad Bhaskar Vernekar
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Thanks kavitha for the detailed explanation.
It is my pleasure sharing the info Bhaskar.

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