CMA Foundation · Fundamentals of Business Economics and Management · The Fundamentals of Economics
A firm has ₹10,00,000 and can invest it in Project X yielding ₹1,20,000 a year, Project Y yielding ₹1,05,000 a year, or Project Z yielding ₹90,000 a year. Only one project can be undertaken. It chooses Project X. What is the opportunity cost of this decision per year?
The opportunity cost is ₹1,05,000 per year. Opportunity cost is the value of the best alternative given up, and of the two rejected projects, Project Y offers the higher return at ₹1,05,000, compared with ₹90,000 for Project Z.
- A₹1,20,000
- B₹1,05,000Correct
- C₹2,15,000
- D₹15,000
Explanation
Opportunity cost is the value of the next best alternative forgone. Among Y (₹1,05,000) and Z (₹90,000), the best forgone is Y at ₹1,05,000. ₹1,20,000 is the return gained, not forgone, and the sum of the others wrongly adds alternatives that could not be taken together. ₹15,000 is the net gain over Y, not the cost.
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