A firm has a general-purpose machine,which has a book value of $300,000 and is worth $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)$200,000

Question

Quizplus · Accepted Answer

The opportunity cost is the value of the next best alternative use of the machine. In this case, the next best alternative is to sell the machine for $500,000. The tax on the sale would be $500,000 x 35% = $175,000. The after-tax proceeds from the sale would be $500,000 - $175,000 = $325,000. The opportunity cost of using the machine in the project is therefore $325,000 - $300,000 = $25,000.

A Firm Has a General-Purpose Machine,which Has a Book Value