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Posted by / 06-Oct-2019 18:06

Say that you have option A, to invest in the stock market hoping to generate capital gain returns.Option B is to reinvest your money back into the business, expecting that newer equipment will increase production efficiency, leading to lower operational expenses and a higher profit margin.It is equally possible that, had the company chosen new equipment, there would be no effect on production efficiency, and profits would remain stable.

The opportunity cost of choosing this option is 10% - 0%, or 10%.In this scenario, investing ,000 in company A netted a yield of ,000, while the same amount invested in company B would have netted ,000.The ,000 difference is the opportunity cost of choosing company A over company B.Understanding the potential missed opportunities foregone by choosing one investment over another allows for better decision-making.The formula for calculating an opportunity cost is simply the difference between the expected returns of each option.

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From an accounting perspective, a sunk cost could also refer to the initial outlay to purchase an expensive piece of heavy equipment, which might be amortized over time, but which is sunk in the sense that you won't be getting it back.