Notre Dame - Finance - Opportunity Cost in Practice

Opportunity Cost Examples

Identifying the opportunity costs associated with a given financial decision requires practice because opportunity costs themselves can be abstract. It is often helpful to think through all of the options available in given scenarios. Individuals and businesses alike face opportunity costs: identifying the opportunity costs before making choices enables them to make the best choice for advancing their financial goals.

The cards below represent chosen paths for the given scenario. As you read each choice, consider its potential opportunity costs before hovering/tapping the card for an explanation of those opportunity costs.

Emily, a recent college graduate, receives a $1,500 bonus at work. She’s trying to decide how to use it wisely. She has three options:

Use the money to pay down part of her $5,000 credit card debt, which has a 20% annual interest rate.

Opportunity Cost

Emily won’t have the bonus available for her vacation savings or to enjoy the immediate gratification of a new laptop and trip. However, she saves money in the long term by reducing high-interest debt.

Put the bonus into a savings account that earns 3% annual interest for her upcoming vacation.

Opportunity Cost

Emily continues to accrue interest on her credit card debt, potentially making her overall financial situation worse. Additionally, she delays the purchase of a laptop and the fun experiences she could have with her friends.

Spend the bonus on a new laptop and a weekend getaway with friends, which she’s been wanting for months.

Opportunity Cost

Emily misses the chance to reduce her high-interest credit card debt, which will lead to her paying significantly more over time. She also forgoes earning interest on her savings, which could have supported her financial goals for the vacation.

RiverTech, a growing software company, has a $100,000 surplus from a successful quarter. The leadership team is deciding how to allocate the funds and has three options:

Invest in upgrading their customer relationship management (CRM) software to improve efficiency.

Opportunity Cost

The company forgoes the chance to boost immediate revenue through marketing or to have a financial safety net for unexpected situations. While the CRM upgrade may improve efficiency long-term, it delays immediate growth opportunities.

Use the surplus to expand marketing efforts, aiming to increase customer acquisition and revenue growth.

Opportunity Cost

The company sacrifices operational improvements from a more advanced CRM system, potentially limiting efficiency. Additionally, they won’t have the surplus saved for emergencies, leaving the company more vulnerable to unexpected challenges.

Save the money in a high-yield business account to serve as an emergency fund or future investment.

Opportunity Cost

The company misses the opportunity to grow revenue through expanded marketing or streamline operations with a better CRM. While saving provides security, it may result in slower growth or inefficiencies compared to immediate investments.