Opportunity Cost
The term "opportunity cost" refers to the fact that money is finiteand can be spent in a number of ways, or invested, and that eachopportunity to use that money has both obvious and hidden costs as well asobvious and hidden benefits (Sivaramakrishnan, 2002). The "opportunitycost" of buying a computer is the money spent to buy it. The real cost,and the real benefits, will vary from situation to situation. In abusiness, upgrading computers might lead to increased productivity. Athome, it might simply be a personal desire to have a faster, more up-to-date machine, with no real tangible gain, and loss of the earnings the One place individuals could look at opportunity cost in terms of howthey spend their own personal money could be in acquiring a collegeeducation. While it is very time-consuming to earn a bachelor's degree ona part-time basis, it is more feasible to complete a master's degree inthat way, making it a rational place to look at opportunity cost. The first step in analyzing opportunity cost is to consider the twooptions. In this case, the student has the choice to take a leave ofabsence from work, move out of town, and earn an MBA by attending g
Over one year, that'sa savings of $1,200. If$100 were invested at an average 10% return for 20 years, the return wouldbe about $730, giving the person an Opportunity Cost Factor (OCF) 7. This person canstill invest about $3,000 each year. So to consider thecost opportunity for the two options presented, we have to consider notonly the costs of attending school full time out of town as compared topart-time locally, but the increased earnings over time as well. Under this plan, it takes him four years to complete his master's,but with no loss of income. , costs about $500, so the savings is actually $700. By comparison, allowing for the fact that some of the tuition costwould have been invested longer, the $3,750 could have grown to $20,800. Let's assume that his employer is willing to pay 50% of what is left,making that number $2,500. Moving -500Educationalexpenses -2,500Food (balances out; he has to buy food wherever he is)Entertainment (cheaper as a student; students choose cheaper entertainment) +200Utilities (slightly lower because of smaller apartment +200Loss of income for one year -$40,000 The total cost based on these figures for the one-year MBA is $42,600,which comes out of the student's accumulated savings. If it were all invested, that $10,000 alone could grow to$60,000 in 20 years. So that personwould miss out on opportunity costs of about $208,000, not accounting forraises or promotions. Now, let's assume that this student considers option b and stays intown. Now we have to look at the long-term impact on investment gains. Let's assume the program costs, with books, tuition, etc.
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