Question

When calculating operating cash flow in finance, do you subtract opportunity costs from the calculated OCF?

In other words, how does one factor opportunity costs into OCF and FCF?

Answer 1

Opportunity costs are the costs that company forgone by taking up a new project. For example, Company owns a warehouse which is needed for the new project, but it already receiving an annual rental of $40,000 from the warehouse. For suppose, company uses this warehouse for the new project, then it is forgoing 40,000 rental income. So we should deduct this opportunity cost of $40,000 from free cashflow till the project ends for evaluating the capital budgeting techniques like NPV,PI, IRR, MIRR etc.,

Hope this example clarifies.