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CBAP · Question #30

Your organization is trying to determine which one of two opportunities they will pursue. The Project A is worth $235,987 and Project B is worth $567,000 but carries significant risk. The…

The correct answer is C. $235,987. Opportunity cost is the value of the best alternative that was foregone when a decision was made, which here equals the value of the unchosen Project A.

Strategy Analysis

Question

Your organization is trying to determine which one of two opportunities they will pursue. The Project A is worth $235,987 and Project B is worth $567,000 but carries significant risk. The organization elects to purse Project B and not Project A. What is the opportunity cost in this scenario?

Options

  • A$331013
  • BThere is not enough information to know as the risk for Project B has not been quantified.
  • C$235,987
  • D$567,000

How the community answered

(30 responses)
  • A
    10% (3)
  • B
    7% (2)
  • C
    80% (24)
  • D
    3% (1)

Why each option

Opportunity cost is the value of the best alternative that was foregone when a decision was made, which here equals the value of the unchosen Project A.

A$331013

$331,013 is the arithmetic difference between the two project values, which is not how opportunity cost is defined - it is not a comparison of values but the value of the single forgone alternative.

BThere is not enough information to know as the risk for Project B has not been quantified.

Opportunity cost does not depend on risk quantification; it is simply the value of the alternative not chosen, and enough information is provided in the stated value of Project A to determine it.

C$235,987Correct

Opportunity cost is defined as the value of the next-best alternative that is given up as a result of making a decision. Because the organization chose Project B and did not pursue Project A, the value sacrificed - the opportunity cost - is the value of Project A at $235,987, regardless of the risk profile of the chosen option.

D$567,000

$567,000 is the value of Project B, the option that was actually chosen and pursued, not the value of the alternative that was given up.

Concept tested: Opportunity cost in project selection decisions

Source: https://www.iiba.org/standards-and-resources/babok/

Topics

#opportunity cost#decision analysis#financial analysis#investment tradeoffs

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