The opportunity cost is merely the expense of not making a decision.
As a result, if you chose Project P placed above a white Project Q, the opportunity cost for such a decision is 75,000 times the estimated NPV of Project Q.
What is Net Present Value (NPV)?
The distinction between current value of money over time value of cash outflows over time is defined as net present value (NPV).
Some key features regarding the Net Present Value (NPV) are-
- To calculate NPV, approximate the amount and timing of future cash flow and choose a discount factor equal to a minimum standard rate of return.
- A discount rate may represent ones cost of capital or even the releasing on comparable risk investments.
- If a project's or investment's NPV is positive, this means it's own rate of return would be greater than the discount rate.
- NPV takes into account the time value of the money and may be used to compare this same rates of return of various projects or to compare a predicted rate of return with hurdle rate required to endorse an investment.
- The discount rate, which may be a hurdle rate for just a particular project on the a company's cost of capital, represents the time value of money in the NPV formula.
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