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Running head: MANAGERIAL ECONOMICS 1
Managerial Economics
Institution Affiliation
Date

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MANAGERIAL ECONOMICS 2
How This Case Illustrates the Concept of the Opportunity Cost of Capital
The concept of opportunity cost is widely used in economics to explain the value of
preceding an option for another alternative option. The opportunity cost of capital is the
incremental return on investment when a firm chooses to invest in an internal project rather than
marketable securities. Businesses increase their value through investments. Investment
opportunities exist both internally and externally. External assets such as stocks, bonds or
commodities generate income through return on investment. Internal projects help increase
revenue by cutting unnecessary costs that expand the firm's overall expenditure (Ahuja, 2017).
Inventory management is a promising avenue for cost-cutting. Holding large amounts of slow-
moving inventory ties up capital, which could be used to invest in other avenues, either internally
or externally. In the case of J.C Penney, the apparel retailer was holding large amounts of slow-
moving shirts that were tying up capital.
The integration with the supplier, TAL apparel, helped release the capital tied up in J.C
Penney’s warehouses' stock of shirts. The shirts' supplier was getting real-time data of the sale of
the shirts from the stores to forecast demand for manufacturing the shirts. This integration was
made possible by investing in an inventory system. J.C Penney invested in the internal project of
having an integrated inventory system with its leading supplier. The investment helped free up
capital associated with too much stock. Hence, J.C Penney foregone to invest in other
components and invest in a robust inventory system. The funds tired up to the inventory was now
freed up, which provided capital to invest in the new inventory system. Also, J.C Penney will
now see an increase in profits due to a much less burden on the revenues generated. The return
on investment in the new inventory system is a long-term investment opportunity to cut costs.
How Innovation Also Help in Demand Management

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Running head: MANAGERIAL ECONOMICS Managerial Economics Institution Affiliation Date 1 MANAGERIAL ECONOMICS 2 How This Case Illustrates the Concept of the Opportunity Cost of Capital The concept of opportunity cost is widely used in economics to explain the value of preceding an option for another alternative option. The opportunity cost of capital is the incremental return on investment when a firm chooses to invest in an internal project rather than marketable securities. Businesses increase their value through investments. Investment opportunities exist both internally and externally. External assets such as stocks, bonds or commodities generate income through return on investment. Internal projects help increase revenue by cutting unnecessary costs that expand the firm's overall expenditure (Ahuja, 2017). Inventory management is a promising avenue for cost-cutting. Holding large amounts of slowmoving inventory ties up capital, which could be used to invest in other avenues, either internally or externally. In the case of J.C Penney, the apparel retailer was holding large amounts of slowmoving shirts that were tying up capital. The integration with the supplier, TAL appare ...
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