Question

In: Finance

Cleveland Steel Tool paid $179,000, in cash, for equipment three years ago and spent $18,000 for...

Cleveland Steel Tool paid $179,000, in cash, for equipment three years ago and spent $18,000 for equipment upgrades last year. The company no longer uses this equipment and has received a cash offer of $68,000 from a buyer. The current book value of the equipment, including all updates, is $54,500. What value, if any, should the company assign to this equipment should it decide to use the equipment for a new project?

Multiple Choice

  • $0

  • $54,500

  • $68,000

  • $74,500

  • $129,000

Solutions

Expert Solution

The book value of asset of $54,500 is sunk costs which has already been incurred and thus not relevant for decision making. Company has received offer to sell the equipment for $68,000 and if this equipment is used in new project then the $68,000 would be opportunity cost which is lost due to use in project. Opportunity costs is relevant costs to consider for new projects. Thus, company should assign costs of $68,000 to equipment used in new project.

jeff jeffy answered 2 years ago
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