What is an opportunity cost? Should it be included in the incremental cash flows for a project? ...

Memphic

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6 years ago

What is an opportunity cost? Should it be included in the incremental cash flows for a project? ...

What is an opportunity cost? Should it be included in the incremental cash flows for a project? Why or why not?

Textbook

Corporate Finance: The Core

Edition: 4^th

Authors: Berk, DeMarzo

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deusmaroto

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6 years ago

Many projects use resources that the company already owns. An opportunity cost is the cost of using a resource that otherwise could have provided value to the firm. The opportunity cost of using a resource is the value it could have provided in its best alternative use. Because this value is lost when a resource is used by another project, we should always include the opportunity cost as an incremental cost of the project.

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