FunTrivia Homepage New Questions Unanswered Post a Question Goto Qn # Archives

# How do you calculate opportunity cost?

Question #99136. Asked by calinis. (Sep 03 08 7:45 PM)

BRY2K

Investors define opportunity cost as the difference in return between a chosen investment and one that is necessarily passed up. In other words, it is the amount of money you could have earned if you invested in the optimal investment.

For example, between investing and paying off debt, if we decide to pay off or pay down credit card debt, we give up an opportunity to invest the same amount.

In this case, the interest that we could have earned on the investment is the opportunity cost of paying off debt.

Opportunity cost is an important economic principle that affects the value of our financial decisions. For example, if we make a \$1,000 payment on a 12% credit card, we can lower our interest expense. For one month alone, we save \$10 in interest (\$1,000*0.12/12). However, in order to pay down this debt, we may have passed up an opportunity to earn a 5% annual interest rate in a CD or other money market account. The opportunity cost, in this case, is \$4.17 (\$1,000*.05/12) in interest income.

Subtracting the opportunity cost of \$4.17 from the debt savings of \$10, we obtain a net savings of \$5.83.

Here's a useful rule of thumb for incorporating opportunity cost into your financial decision-making: If you face a spend-or-invest trade-off and decide to pay off debt, subtract the income you could have earned on the investment to calculate a net savings.

If you decide to invest, subtract the interest you could have paid off on the debt to calculate net savings.

 Sep 03 08, 7:51 PM

### Other Similar Questions & Answers

 How do you calculate marginal cost and marginal benefit?

### Suggested Related FunTrivia Quizzes - 90,000 currently online

1 Window of Opportunity
 This quiz is about one of my favorite episodes of "Stargate SG-1", "Window of Opportunity". Hope you like it!
'Stargate: SG-1' Season 4 Easy
10 Q
goldeneaglle
Jul 31 05
1137 plays
2 A Fraction of the Cost
 In the game of soccer, it costs millions to buy the best players. Can you spot the players that cost very little and went on to become invaluable to their team?
UK Football Mixture Average
10 Q
dolano
Sep 03 10
453 plays
3 3.5 "Cost of Living"
 All of these questions pertain to the episode titled, "Cost of Living", which was the fifth episode of season three. Good luck!
LOST: Season 3 Average
10 Q
CAGuy0206
Oct 28 09
144 plays

"Ask FunTrivia" is for entertainment purposes only, and answers offered are unverified and unchecked by FunTrivia. We cannot guarantee the accuracy or veracity of ANY statement posted. Feel free to post an updated response if you feel that an answer is inadequate or incorrect. Please thoroughly research items where accuracy is important to you using multiple reliable sources. By accessing our website, you agree to be bound by our terms of service.