Webster & Moore paid $148,000, in cash, for a piece of equipment 3 years ago. At

Question

Webster & Moore paid $148,000, in cash, for a piece of equipment 3 years ago. At the beginning of last year, the company spent $21,000 to update the equipment with the latest technology. The company no longer uses this equipment in its current operations and has received an offer of $96,000 from a firm that would like to purchase it. Webster & Moore is debating whether to sell the equipment or to expand its operations so that the equipment can be used. When evaluating the expansion option, what value, if any, should the firm assign to this equipment as an initial cost of the project?

Explanation / Answer

Opportunity cost: Money a firm sacrifices to pick an alternative on cost of another alternative. Here, Webster & Moore loose current market value of equipment $96,000, if they choose expansion rather than sell of equipment.

Current market value of equipment is $96,000 which is offered by a firm, if Webster & Moore do not sell this equipment and go for expansion then $96,000 would be an initial cost of the project.

Relevant value is $96,000.

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