If two investment opportunities have NPVs of $100,000 and $75,000, what is the most nearly the opportunity cost of choosing the higher-NPV project?

If two investment opportunities have NPVs of $100,000 and $75,000, what is the most nearly the opportunity cost of choosing the higher-NPV project?

• A. $25,000
• B. $50,000
• C. $75,000
• D. $100,000

Answer: (C)

Opportunity cost is the value of the best alternative you give up when you make a choice. If you pick the project with the higher NPV, you forgo the other project, which would deliver an NPV of 75,000. So the opportunity cost of choosing the higher-NPV project is 75,000. The 25,000 difference between the two NPVs shows the extra value you gain by choosing the better project, not the cost of choosing it.

Opportunity cost is the value of the best alternative you give up when you make a choice. If you pick the project with the higher NPV, you forgo the other project, which would deliver an NPV of 75,000. So the opportunity cost of choosing the higher-NPV project is 75,000. The 25,000 difference between the two NPVs shows the extra value you gain by choosing the better project, not the cost of choosing it.