Opportunity cost represents the value of the best alternative foregone.

Opportunity cost represents the value of the best alternative foregone.

• A. The cash outlay
• B. The depreciation on assets
• C. The tax shield
• D. The value of the best alternative foregone

Answer: (D)

Opportunity cost is the value of the best alternative foregone. When you choose one option, you give up the next best alternative, so the cost you consider in decision making is the benefit you miss from that alternative. This definition focuses on what you sacrifice, not on money you have spent or accounting charges. For example, if you can invest in one project that pays 12,000 this year but the best alternative would pay 15,000, the opportunity cost of choosing the first project is 15,000—the foregone benefit from not choosing the second option. This concept is about lost benefits, not actual cash outlays, depreciation, or tax shields, which are separate ideas: cash outlay is the money spent now, depreciation is a non-cash accounting allocation, and the tax shield is a tax saving, not the foregone benefit of another choice.

Opportunity cost is the value of the best alternative foregone. When you choose one option, you give up the next best alternative, so the cost you consider in decision making is the benefit you miss from that alternative. This definition focuses on what you sacrifice, not on money you have spent or accounting charges. For example, if you can invest in one project that pays 12,000 this year but the best alternative would pay 15,000, the opportunity cost of choosing the first project is 15,000—the foregone benefit from not choosing the second option. This concept is about lost benefits, not actual cash outlays, depreciation, or tax shields, which are separate ideas: cash outlay is the money spent now, depreciation is a non-cash accounting allocation, and the tax shield is a tax saving, not the foregone benefit of another choice.