This document discusses the importance of considering opportunity costs when making business decisions. It provides examples of how ignoring opportunity costs can be costly for senior management. Managers are advised to map out the cash flows of various options, including the option of doing nothing, and evaluate both monetary and non-monetary impacts to make informed choices. Specifically, the opportunity cost of choosing not to invest in an energy saving project with available financing could be missing out on significant savings over several years.

1. The benefit foregone by choosing one option
instead of another

2. The cost of choosing an option is the
benefit foregone by not choosing an
alternative option.
This concept is often totally missed
by senior management in their
decision making process.
Did you know there is a cost to doing
nothing!

3. What is the cost of doing nothing?
Perhaps the best way to answer this
question is to map out the direct
cash flows that would result from
doing something as opposed to
nothing!
Ignoring the time value of money, a
simple cash flow forecast can be very
enlightening in assisting managers to
make informed decisions

4. Investment appraisal doesn’t need to
be too complex!
1. Map out the specific cash flows
for each option
2. List any non-cash benefits for
each option
3. Evaluate the non-cash benefits
such as reduction in CO2
emissions
4. Make an informed decision

5. Example 1
Q. What is the cost of using an
invoice factoring facility?
A. List the charges and discounting
fees that will be incurred THEN
CONSIDER THE OPPORTUNITY COST
OF NOT HAVING A FACTORING
FACILITY..
Having cash could allow you to buy
some heavily discounted liquidation
stock and if this discount amounted
to £10,000 then the opportunity cost
of not having cash to complete the
purchase would then be……? YES
£10,000

6. Example 2
Capital Investment in Low Carbon
Technology
Q. What is the opportunity cost of
choosing not to invest in an energy
saving project where finance is
available solely for that project?
A. Map out the cash flow forecast
that would result from adopting the
project and obtaining the finance
and arrive at a Net Present Value for
the investment (NPV).

7. Summary
Always consider the costs associated
with doing nothing because they can
be considerable
5 years ago a company had an
opportunity to invest £150,000 in a
LED factory lighting system saving
£95,000 per year. The money was
made available by The Carbon Trust
specifically for the project. If the
company had a rule of rejecting any
project with a payback of more than
1 year what would have happened?