Question

A company had a choice between Project X and Project Y. The net present value of Project X is $1,000,000, and the net present value of Project Y is $750,000. The company chose Project X. What is the opportunity cost of that decision?

Answer 1

The opportunity cost of choosing Project X over Project Y is $250,000.

Step-by-step explanation:

The opportunity cost of choosing Project X instead of Project Y is the value or benefit that the company forgoes by not choosing Project Y. In this case, the opportunity cost would be the difference in net present value between the two projects, which is $1,000,000 - $750,000 = $250,000.

This means that by choosing Project X, the company is giving up the opportunity to gain an additional $250,000 that could have been obtained by choosing Project Y.

By calculating the opportunity cost, the company can assess the potential benefit or loss resulting from choosing one option over another, and make informed decisions based on the comparison of costs and benefits.