Question

What is the present value at opportunity cost?

Answer 1

Opportunity cost is the rate of return on a risk free asset.

e.g, If your friend owes you $100 and says he or she will give it back to you after an year.

But if you invest $100 today at risk free rate of 3% you could get $103 after an year. By lending $100 to your friend, you gave up your opportunity cost of $3

Present Value of opportunity cost = C/(1+R)T

where C is cash flow

R is rate of interest

T is no. of years

So, Present Value of opportunity cost = 3/1.03

= 2.91