The
Opportunity Cost of Capital (OCC)
The OCC is the expected
return that your are giving up by investing
in a project rather than in the stock market.
In other words, it is the project's opportunity
cost of capital.
Estimate
the Opportunity Cost of Capital (OCC) :
Investment project
:
| Investment project |
100'000 € |
| Cash flow in year 1 |
110'000 € |
Expected return on the
project :
| (110'000
-100'0000) |
=
10 % |
|
| 100
'000 |
Investment in stock
:
Today's price : 95,65 €. Expected price
at the end of the year : 110 €
| (110
- 95,65) |
=
15 % |
|
| 95,65 |
Conclusion :
Expected return on stocks is 15
%. This return of 15 % is the project's OCC.
In this example, we do not invest in the project.
Sources :
Principles of Corporate Finance, 8th edition, Richard A. Brealey & Stewart C. Myers, McGraw-Hill
Corporate
Finance Course, Bernard Jaquier, Professor
of Economics & Finance ,Lausanne, Switzerland, 2018
