1. Describe something you spent money on (or that was bought for you) a long time ago (the longer, the better)
   • Estimate the month/year of this cash flow
   • How much money was spent?
   • What did you (or your parents, etc.) buy?
2. Imagine that money had instead been invested in a no-fee, tax-free S&P 500 index fund. In other words, the opportunity cost of that purchase is the return that you would have gotten from the S&P 500 from that time until now.
3. Calculate the value that investment would have today.
   • visit S&P 500 Return Calculator, with Dividend Reinvestment (dqydj.com) (Links to an external site.)
     • enter month/year of above purchase as start month/year
     • enter current month/year as ending month/year
     • do not adjust for inflation
     • press calculate
     • Note percentage for Total S&P 500 Return (Dividends Reinvested). This is a rare example of a rate for a multi-year period. This makes our math unusually simple.
   • Calculate future value using formula for a single-period. FV=PV(1+r)
     • In the context of setting up a calculation, the cash flow at the start of the investment period is referred to as the present value (PV). That's the amount that you spent long ago.
     • Similarly, the cash flow (or value) at the end of the investment period is referred to as the future value (FV).
     • r is the rate of return as calculated above. Remember to convert percentages to decimals. (e.g. 1+r for 123.4% = 2.234)
4. Summarize your result with a clear statement. e.g. "The opportunity cost of the bike my parents bought me for my 10th birthday is $4364.18 in today's dollars."

Scenario 2

1. Describe something you spent money on within the last year
   • How much did you spend?
   • What did you buy?
2. Imagine that money had instead been invested in a no-fee, tax-free S&P 500 index fund.
3. Calculate the value that investment would have when you reach age 65 (or another age of your choice).
   • Use your choice of formulas, financial calculator, or excel to do the calculation
   • Use 12% as your r (expected average annual rate of return)
   • PV is this year's purchase amount
     • If using excel or financial calculator, express PV as a negative amount (outflow). This will result in the FV being expressed as a positive (inflow).
   • N (or Nper) is the number of years until you reach age 65
   • FV is the value of the investment at your age 65
4. Summarize your result with a clear statement. e.g. "The opportunity cost of the coffee I bought this morning is $259.61 forty years from now."

Answer rating: 100% (QA)

Explanation stepbystep Scenario 1 The Nostalgic Purchase A long time ago in the month of June 1995 m... View the full answer