Assume your firm has an unused machine that originally cost $75,000,has a book value of $20,000,and is currently worth $25,000.Ignoring taxes,the correct opportunity cost for this machine in capital budgeting decisions is:
A) $75,000
B) $25,000
C) $20,000
D) $5,000

Question

Quizplus · Accepted Answer

The opportunity cost of a resource is what can be earned by using that resource in its next best alternative use. Since the machine is worth $25,000 now, selling it and investing the proceeds would provide a return of $25,000. Therefore, the opportunity cost of the machine is $25,000. The original cost and book value are sunk costs and do not affect the opportunity cost.

Assume Your Firm Has an Unused Machine That Originally Cost