Question

A company owns a 5-year old turret lathe that has a book value of $20,000. The present market value of the lathe is $16,000. A new turret lathe can be purchased for $45,000. Using a before tax analysis and an outsider’s point of view, what is the fi rst cost of keeping the old lathe?

Answer 1

Answer: $16,000

Explanation:

The Outsider's Point of View is also known as The OPPORTUNITY COST APPROACH.

This as you may know, refers to the cost associated with choosing an alternative over others.

In this scenario, the company owns the 5 year old turret lathe so the Opportunity Cost must be the cost of still owning it.

Since this is the case then the first cost of owning the Lathe is simply the Market Value of the Lathe at the moment.

This is $16,000.

$16,000 therefore is the First Cost of keeping the Old Lathe