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 percent, 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 of using the machine in the project is equal to the market value of the machine, which is $500,000. However, there is also a tax implication on the machine, since it has a book value of $300,000. If the firm uses the machine, it will no longer be able to sell the machine at the market value of $500,000, and if it sells the machine, it will have to pay taxes on the difference between the market value and the book value. Therefore, the opportunity cost of using the machine in the project is the after-tax value of the machine, which is:
$500,000 - (0.35 x ($500,000 - $300,000)) = $430,000. Thus, the best choice is B.

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