Opportunity cost

Submitted by Kezniche on Sun, 05/23/2010 - 06:40

Hi All,


Q. In a situation where a PM has to select  among 4 projects based on their NPV values. The opportunity cost of this selection is it the Project with the lowest NPV value or the Project with next best value? Can any on you guys shed on more light on this scenario? Thanks

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chowdary2104's picture

chowdary2104

Sun, 05/23/2010 - 11:24

Good question...


Answer would be "Project with next best value".


Regards

ChandraR

Sun, 05/23/2010 - 11:33

Opportunity Cost is the second best NPV which you forego in the process of selecting a project in preference to the Best one.  You lost/give up that opporunity and the corresponding project cost is defined as Opportunity Cost.  If a numerical question is given, calculate the NPV of each project, arrange them in ascending order and pick the 2nd from top as opporunity cost


Chandra