The benefit foregone by choosing one option instead of another

Opportunity Cost

The cost of choosing an option is the benefit foregone by not choosing an alternative option.

This concept is often totally missed by senior management in their decision making process.

Did you know there is a cost to doing nothing!

Opportunity Cost

What is the cost of doing nothing?Perhaps the best way to answer this question is to map out the direct cash flows that would result from doing something as opposed to nothing!Ignoring the time value of money, a simple cash flow forecast can be very enlightening in assisting managers to make informed decisions

Opportunity Cost

Investment appraisal doesn’t need to be too complex!1. Map out the specific cash flows

for each option2. List any non-cash benefits for

each option3. Evaluate the non-cash benefits

such as reduction in CO2 emissions

4. Make an informed decision

Opportunity Cost

Example 1Q. What is the cost of using an invoice factoring facility?A. List the charges and discounting fees that will be incurred THEN CONSIDER THE OPPORTUNITY COST OF NOT HAVING A FACTORING FACILITY..Having cash could allow you to buy some heavily discounted liquidation stock and if this discount amounted to £10,000 then the opportunity cost of not having cash to complete the purchase would then be……? YES £10,000

Opportunity Cost

Example 2Capital Investment in Low Carbon TechnologyQ. What is the opportunity cost of choosing not to invest in an energy saving project where finance is available solely for that project?A. Map out the cash flow forecast that would result from adopting the project and obtaining the finance and arrive at a Net Present Value for the investment (NPV).

Opportunity Cost

SummaryAlways consider the costs associated with doing nothing because they can be considerable5 years ago a company had an opportunity to invest £150,000 in a LED factory lighting system saving £95,000 per year. The money was made available by The Carbon Trust specifically for the project. If the company had a rule of rejecting any project with a payback of more than 1 year what would have happened?

Opportunity Cost