When introducing the topic of investment appraisal, I often use the concept of the opportunity cost of raising children to illustrate the process of an investment decision. While most parents might not necessarily see their children as a business investment, the illustration can help to make investment appraisal less abstract. In many parts of the world, and not necessarily only in less economically developed countries, parents may choose to have children as a form of security for their retirement.
Opportunity cost is defined as the best alternative that is forgone when making a decision. Due to limited resources, such as time and money, people are confronted with choices. The study of business assumes that managers are rational decision makers, i.e. they choose the option that gives them the most benefit, be it financial or otherwise. For example, if a student decides to study business and management at university, the costs would include purchasing textbooks and the tuition fees.
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