How we calculate opportunity cost
Opportunity cost is what you give up by choosing one alternative over another. We project both with compound interest and compare them.
Use the Opportunity Cost CalculatorFormula
amount = value × (1 + return)^years
opportunity cost = amount B − amount A
Variables
- value
- Capital applied to either option.
- return A and B
- Expected annual yield of each alternative, as a percentage.
- years
- Comparison horizon.
Step-by-step calculation
- We project each option with annual compounding.
- We subtract the chosen option's amount from the alternative's amount.
- We indicate which option would yield more over the given horizon.
Worked example
Inputs
- Value: $20,000
- A: 6% per year
- B: 10% per year
- 5 years
Calculation
A = 20,000 × 1.06^5 ≈ 26,765
B = 20,000 × 1.10^5 ≈ 32,210
Choosing A costs about $5,445 in unrealized gains.
Common mistakes
- Ignoring risk: higher returns usually come with more volatility.
- Not accounting for taxes and fees, which the projection doesn't include.
Frequently asked questions
Is compounding annual?
Yes, the model uses annual compounding. Monthly contributions and partial reinvestments aren't considered.
All values are in US dollars (US$). Results are estimates and do not replace professional advice.