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Opportunity Cost

The value or benefit you give up by choosing one project instead of the next-best alternative.

Key Points

  • Equal to the benefit of the best rejected option (e.g., NPV, ROI, or expected value).
  • Applied when options are mutually exclusive and have comparable risk and timing.
  • It is not a cash outflow; it is an economic comparison to guide selection.
  • Do not include sunk costs; focus on future benefits you forgo.

Example

A portfolio team can fund either Project A with expected benefits of USD 1.2M or Project B with USD 900k. They select Project A. The opportunity cost of choosing A is USD 900k, the value of the best alternative they did not pursue.

PMP Example Question

A sponsor must choose between two mutually exclusive projects: Alpha with an NPV of USD 500,000 and Beta with an NPV of USD 420,000. If the sponsor selects Alpha, what is the opportunity cost?

  1. USD 80,000
  2. USD 420,000
  3. USD 500,000
  4. USD 920,000

Correct Answer: B — USD 420,000

Explanation: Opportunity cost is the value of the best alternative not chosen, which is the NPV of Beta (USD 420,000).

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