Business Opportunity - Opportunity cost is defined as the cost to you of passing up an opportunity. When it comes to business opportunities, many factors may weigh into your decision of whether or not you are willing to invest your time, money and resources.
Since business is serious business, most people look first at the bottom line: what will this opportunity cost me? Whether that is in terms of money up front, or over time, looking at the overall costs versus the projected return on investment is a good way to begin analysis of this opportunity.
ROI isn’t always easy to project, however, since there are many factors you can take into consideration and it is entirely up to you how simple or complex you wish to make the analysis. Taking as an example, the real estate market, you could project ROI as simply as the purchase price versus expected selling price, at some number of years into the future, then divide that into the number of years in order to project your annual return.
Or, you can take a more thorough approach, with a more complex analysis that takes into account annual costs of maintenance, HOA dues, property taxes, planned upgrades, etc., and compares that to both projected income (rental or presumed rent if home is owner-occupied) and to the anticipated future value (read selling price) of the property, given normal appreciation and planned upgrades.
In business similar calculations can be made. An example of a simple ROI calculation for a business opportunity would be the purchase and sale of stock (or stock options). Your return on investment would simply be the Selling Price of the Shares divided by their Purchase Price, minus 1 (to arrive at a percentage), and then you divide that percentage by the number of years you held the stock.
For example, you purchase 100 shares of stock at $10.00 per share. 3 years later, you sell the stock for $15.00 per share. Your effective pre-tax ROI would be 16 2/3% per year. The opportunity cost of passing up that transaction would be the difference between that ROI and the ROI you earned on the money instead. So, if you left your money in the bank earning 5% interest per year, the opportunity cost for this example would be just under 12%.
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