Answer the following questions and put calculations 19. Storage USA is consideri

Question

Answer the following questions and put calculations

19. Storage USA is considering expanding their operations. The company owns a lot near the present facility on which a new building can be constructed. The land was purchased 10 years ago for $50,000 and now has a market value of $180,000. Assuming a tax rate of 35%, calculate the opportunity cost of the land.

a)$130,000

b)$134,500

c)$ 84,500

d)$180,000

20. The cost of capital is used primarily in

a)negotiations with banks because it reflects the company's overall borrowing power

b)setting the firm's basic risk level

c)capital budgeting because it reflects what the firm pays for the money it invests

d)negotiations with investment bankers because it establishes an overall return on which the market can base prices for the firm's securities

Explanation / Answer

19)

Opportunity cost of land is the present market value of the land after taxes.

Hence, opportunity cost of land:

= $180,000-($180,000-$50,000)*35%

= $180,000-$45,500

= $134,500

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