Opportunity Cost Of Capital. Basically cost of capital is the opportunity cost of investing the same amount of cash into different investment opportunities with the real cost of capital the amount of money that could have. The opportunity cost of capital is any money that is risked by a business when it chooses to invest its funds in a new project or initiative rather than in investment securities.
5 of 2 000 000 is 100 000. For example if a person has 10 000 to invest and must choose between stock a and stock b the opportunity cost is the difference in their returns. Example of the opportunity cost of capital for example the senior management of a business expects to earn 8 on a long term 10 000 000 investment in a new manufacturing facility or it can invest the cash in stocks for which the expected long term return is 12.
It is not an explicit cost which is paid out of the pocket.
The opportunity cost of capital 1. Opportunity cost analysis also plays a crucial role in determining a business s capital structure. It is not an explicit cost which is paid out of the pocket. This may occur in securities trading or in other decisions.
