What is an opportunity cost?

An opportunity cost is the cost of a benefit which is forfeited as the result of choosing not to do something.

Let's take an example.

You are self employed and have booked a two week cruise at a cost of R80 000 plus airfare of R10 000. Just before your holiday is about to start, you get an offer to present a series of seminars on the health benefits of gluten free food products, which is what your company makes and sells. The organisers, Discovery Ltd, will pay you R120 000 for the seminars.

If you decide to continue with the holiday, there's a a dual opportunity cost. One is easy to calculate - it is the R120 000 fee that you will not earn. The other is the value of the free promotion of your company and its products that would flow from the seminars. You estimate this to be R250 000.

So what is your holiday actually costing you? R80 000 + R10 000 + R120 000 + R250 000 = R460 000!

It may still be worth it, but at least be aware of the cost of your decision.


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