Opportunity Cost Calculator
The difference between the future profits is the opportunity cost definition.The Amount of cash you’d like to spend. The Rate explains much will earn on the investment.The current tax rate that you will pay after the investment period.
Let us consider,
- The amount of cash you’d like to spend;
- Your expected rate of return – the rate explains how much will you earn on the investment;
- Years of investment;
- Tax on capital gains – put the current tax rate that you will pay after the investment period; and
- Annual inflation rate – this rate the prices of goods and services increase by.
Opportunity cost formula
- Forgone investment earnings – the interest that you will earn on the investment before tax;
- Nominal opportunity cost – the interest from point 1 added to the invested money;
- Tax on capital gains – the amount of tax that you will have to pay due to capital gains; and
- Nominal gains after tax – the value from point 2 after tax has been deducted.
- Nominal opportunity cost = the money you have * ((1 + rate of return on investment / 12) ^ months of investment – 1)
- Tax on capital gains = nominal opportunity cost * income tax rate
- Nominal gains after tax = nominal opportunity cost – tax on capital gains
- Total savings (after tax) = nominal gains after tax + the money you have
- Total gains with inflation = total savings * ((1 – inflation rate / 12) ^ years of investment)
It costs $15,000. Your alternative is to keep using your current vehicle for the next two years, and invest money with a 3 % rate of return. There is a 22 % tax on capital gains, and the inflation rate is 1.5 %.
- Nominal opportunity cost = $15,000 * (((1 + 3% / 12) ^ 24) – 1) = $926.36
- Tax on capital gains = $15,926.36 * 22% = $203.80
- Nominal gains after tax = $926.36 – $203.80 = $722,56
- Total savings (after tax) = $722,56 + $15,000 = $15,722.56
- Total gains with inflation = $15,722.56 * ((1 – 1.5% / 12) ^ 2) = $15,099.94