Opportunity Cost

This is a very simple concept but i got confused many times before the exam. So i am

posting some inputs together with some examples.

Opportunity Cost concept is used when your are selecting a project to execute from a set of multiple projects available in an organization bucket.

Opportunity cost is the value of the next best choice that one gives up when making a decision. 

Below are few examples to remember this concept

Example 1
If you are to choose between Project A valued at Rs 20,000 and Project B valued at Rs. 50,000. 
- if you select Project A, the Opportunity cost would be Rs. 50,000
- if you select Project B, the Opportunity cost would be Rs. 20,000

Example 2
If you are to choose between Project A valued at Rs 20,000 and Project B valued at Rs. 50,000 and Project C valued at Rs 80,000 

- if you select Project A, the Opportunity cost would be Rs. 80,000
- if you select Project B, the Opportunity cost would be Rs. 80,000
- if you select Project C, the Opportunity cost would be Rs. 50,000

If you are making a choice between more then 2 projects, OC will be the next best cost missed not the sum of all the projects which are not chosen.

Example 3 (from life)
if you are planning to buy mutual funds from W, X, Y, Z company.
 - Mutual Fund W gives a benefit of Rs. 10,000
 - Mutual Fund X gives a benefit of  Rs. 20,000
 - Mutual Fund Y gives a benefit of Rs. 30,000
 - Mutual Fund Z gives a benefit of  Rs. 40,000

So what will be the Opportunity Cost, if you make different choices
 - if you select Mutual Fund W, the OC will be Rs 40,000
 - if you select Mutual Fund X,  the OC will be Rs 40,000
 - if you select Mutual Fund Y,  the OC will be Rs 40,000
 - if you select Mutual Fund Z,  the OC will be Rs 30,000

Hope this post is helpful.