Question

What role does opportunity cost play in the defender vs challenger analysis?

Answer 1

Opportunity cost is an implicit cost which is the benefit foregone by choosing one alternative over another. In economic cost-benefit analysis, opportunity cost of choosing one decision over another is taken into consideration, in addition to accounting (explicit) costs. In a defender-challenger analysis, in order to arrive at correct selection process, the opportunity costs associated with choosing the challenger over the defender have to be included as part of the relevant (incremental) costs to reflect full economic information.