when considering two different securities it is also important to take risk into account for example comparing a treasury bill to a highly volatile stock can be misleading even if both have the same expected return so that the opportunity cost of either option is 0 that s because the u s government backs the return on the t bill making it virtually risk free and there is no such guarantee in the stock market 
opportunity cost and capital structureopportunity cost analysis can play a crucial role in determining a company s capital structure a business incurs an explicit cost in taking on debt or issuing equity because it must compensate its lenders or shareholders and each option also carries an opportunity cost money that a company uses to make payments on its bonds or other debt for example cannot be invested for other purposes so the company must decide if an expansion or other growth opportunity made possible by borrowing would generate greater profits than it could make through outside investments companies try to weigh the costs and benefits of borrowing money vs issuing stock including both monetary and non monetary considerations to arrive at an optimal balance that minimizes opportunity costs because opportunity cost is a forward looking consideration the actual rate of return ror for both options is unknown at that point making this evaluation tricky in practice example of an opportunity cost analysis for a businessassume that a business has 20 000 in available funds and must choose between investing the money in securities which it expects to return 10 a year or using it to purchase new machinery no matter which option the business chooses the potential profit that it gives up by not investing in the other option is the opportunity cost if a business decision is made to go with the securities option its investment would theoretically gain 2 000 in the first year 2 200 in the second and 2 420 in the third alternatively if the business purchases a new machine it will be able to increase its production knowing that the machine setup and employee training will be intensive and the new machine will not be up to maximum efficiency for the first couple of years the company estimates that it would net an additional 500 in profit in the first year then 2 000 in year two and 5 000 in all future years by these calculations choosing the securities makes sense in the first and second years however by the third year an analysis of the opportunity cost indicates that the new machine is the better option 500 2 000 5 000 2 000 2 200 2 420 880 one of the most dramatic examples of opportunity cost is a 2010 exchange of 10 000 bitcoins for two large pizzas at the time worth about 41 1 as of june 2024 those 10 000 bitcoins would be worth over 610 million 2example of an opportunity cost analysis for an individualindividuals also face decisions involving such missed opportunities even if the stakes are often smaller suppose for example that you ve just received an unexpected 1 000 bonus at work you could simply spend it now such as on a spur of the moment vacation or invest it for a future trip for example if you were to invest the entire amount in a safe one year certificate of deposit at 5 you d have 1 050 to play with next year at this time you d also face an opportunity cost with your vacation days at work if you use some of them now with your spare 1 000 you won t have them next year assuming your employer lets you roll them over from year to year as with many similar decisions there is no right or wrong answer here but it can be a helpful exercise to think it through and decide what you most want explicit vs implicit costscompany expenses are broadly divided into two categories explicit costs and implicit costs the former are expenses like rents salaries and other operating expenses that are paid with a company s tangible assets and recorded within a company financial statements by contrast implicit costs are technically not incurred and cannot be measured accurately for accounting purposes there are no cash exchanges in the realization of implicit costs instead they are opportunity costs making them synonymous with imputed costs while explicit costs are considered out of pocket expenses opportunity cost vs sunk costa sunk cost is money already spent at some point in the past while opportunity cost is the potential returns not earned in the future on an investment because the money was invested elsewhere when considering the latter any sunk costs previously incurred are typically ignored 3buying 1 000 shares of company a at 10 a share for instance represents a sunk cost of 10 000 this is the amount of money paid out to invest and it can t be recouped without selling the stock and perhaps not in full even then from an accounting perspective a sunk cost also could 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 the company won t be getting the money back opportunity cost vs riskin economics risk describes the possibility that an investment s actual and projected returns will be different and that the investor may lose some or all of their capital opportunity cost reflects the possibility that the returns of a chosen investment will be lower than the returns of a forgone investment the key difference is that risk compares the actual performance of an investment against the projected performance of the same investment while opportunity cost compares the projected performance of an investment against the projected performance of another investment accounting profit vs economic profitaccounting profit is the net income calculation often stipulated by the generally accepted accounting principles gaap used by most companies in the u s under those rules only explicit real costs are subtracted from total revenue economic profit however includes opportunity cost as an expense this theoretical calculation can then be used to compare the actual profit of the company to what its profit might have been had it made different decisions economic profit and any other calculation that considers opportunity cost is strictly an internal value used for strategic decision making 