OCC (Opportunity Cost of Capital)

The expected return from investments missed in favor of other investments. Opportunity Cost of Capital is calculated by comparing various investment alternatives, their capital costs, and the value they may return. Companies usually choose the highest profit per investment ratio (if all other factors, such as risk, are equal).

Some components are not, traditionally, calculated in OCC but, perhaps, should be. These include: the costs of an investment to the environment, to the company’s reputation, and to the social fabric of an organization’s community. OCC is used as a component in deriving WACC. Also, called Internal Rate of Return (IRR).

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