10 May WHAT IS THE OPPORTUNITY COST IN THE CONTEXT OF CAPITAL BUDGETING AND WHY SHOULD IT BE TAKEN INTO ACCOUNT?
A is considering replacing its existing computer system which was purchased 2 years ago for $325 000. The system can be sold today for $200 000. It is being depreciated using the prime cost method cover a 5-year effective life. A new computer system will cost $500 000 to purchase and install. Replacement of the computer system would not involve any change in net working capital. Assume a 30% tax rate.Calculate the book value of the existing computer system.Calculate the after-tax proceeds from its sale at $200 000.Calculate the initial investment associated with the replacement project.What is the opportunity cost in the context of capital budgeting and why should it be taken into account? Give an example of the opportuity cost of using the excess capacity of an asset.
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