Opportunity costs are costs that are usually missed in the capital budgeting decision process. When a company undertakes a project, it uses resources that would be available if the project was not accepted. If the project had not been accepted, these resources would have alternative uses and would bring contribution. The contribution that is missed is the opportunity cost and should be added to the overall cost of a project when making a decision.
They are relevant because by undertaking a project, you are missing out other opportunities to invest or you are using resources that you would use differently. For example, if by undertaking the project, you will need to use staff that was bringing $10,000 of profit per month, then the $10,000 is your opportunity cost and it’s relevant to the project (it’s a cost that needs to be added). Let’s say that you have limited access to trained and skilled employees and there is no way that you can find other people, then the cost is $10,000 as by undertaking the new project, you will be missing the $10,000.