A firm has a general-purpose machine, which has a book value of $300,000 and is sold for
$500,000 in the market. If the tax rate is 35%, what is the opportunity cost of using the machine in a project?
A) $500,000
B) $430,000
C) $300,000
D) None of the above

Question

Quizplus · Accepted Answer

The opportunity cost of using the machine in a project is the amount the firm could have sold the machine for in the market, which is $500,000, minus the taxes it would have to pay on the sale, which is 35% of the gain ($200,000). Therefore, the opportunity cost is $500,000 - $200,000 = $300,000. The book value of the machine is irrelevant in determining the opportunity cost. Therefore, the correct answer is B) $430,000, which is not an option given.

A Firm Has a General-Purpose Machine, Which Has a Book