Global Industries GI is planning to use some existing equipment from its own facilities in a foreign project.The used equipment has a book value of $2 million but a market value of $6 million.If GI's marginal tax rate is 34%,what is its opportunity cost of using the used equipment in the foreign project?

Question

Quizplus · Accepted Answer

The opportunity cost of using the equipment is its market value, which is $6 million, minus the tax savings from not being able to sell it and realize the gain. The gain on sale would have been $6 million - $2 million = $4 million. The tax on this gain would be 34% of $4 million = $1.36 million. Therefore, the opportunity cost is $6 million - $1.36 million = $4.64 million.

Global Industries GI Is Planning to Use Some Existing Equipment