Opportunity Cost

In Example 13.1, if the company had decided to keep the building, they would have lost the opportunity of investing the $20M they would have received by selling it. The $20M is the cost of the lost opportunity. This value is therefore called the opportunity cost. We can present another cash flow for Example 13.1 using the concept of opportunity cost and can then calculate the NPW.

The NPW is

We reach the same conclusion, i.e., keeping the building for the next five years (the planning horizon) has a negative NPW and, hence, it is not advisable.

Jj2M

1,200,000

20 M

20 M

The retirement problem in effect comes down to checking the future prospects of the proj ect against an investment opportunity with a fixed rate of return.

Project Management Made Easy

Project Management Made Easy

What you need to know about… Project Management Made Easy! Project management consists of more than just a large building project and can encompass small projects as well. No matter what the size of your project, you need to have some sort of project management. How you manage your project has everything to do with its outcome.

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