The Boat Works currently produces boat sails and is considering expanding its operations to include awnings.The expansion would require the use of land the firm purchased three years ago at a cost of $197,000 that is currently valued at $209,500.The expansion could use some equipment that is currently sitting idle if $7,500 of modifications were made to it.The equipment originally cost $387,500 five years ago,has a current book value of $132,700,and a current market value of $139,000.Other capital purchases costing $520,000 will also be required.What is the value of the opportunity costs that should be included in the initial cash outflow for the expansion project?

Question

Quizplus · Accepted Answer

Opportunity costs are the benefits that are foregone when a particular choice is made. In this case, the opportunity costs associated with the expansion project are the benefits that could have been gained by using the resources for some other purpose.

The major opportunity costs in this case would be:

1) The cost of the land that could have been sold for its current market value of $209,500.
2) The cost of the equipment that could have been sold for its current market value of $139,000.

Therefore, the total opportunity cost would be $209,500 (land) + $139,000 (equipment) = $348,500.

Hence, option D is the correct answer.

The Boat Works Currently Produces Boat Sails and Is Considering