A pension fund manager has ₹500 crore available. She can invest in government securities yielding 7% per annum or corporate bonds yielding 9% per annum. She chooses government securities. What is the opportunity cost of her decision? 

Opportunity cost is the value of the next-best alternative foregone as a result of a decision. By investing in government securities at 7%, the manager forgoes the 9% return from corporate bonds. The opportunity cost = ₹500 crore × 2% (the yield difference) = ₹10 crore. Opportunity cost is not the total return from the chosen alternative (₹35 crore), nor the total return from the forgone alternative (₹45 crore). It specifically represents only the incremental benefit of the foregone choice. In cost accounting, opportunity cost is a relevant cost for decision-making (make-or-buy, special order, shutdown decisions) though it does not appear in the books of accounts.