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Answer :
The first cost of keeping the old lathe is its current market value of $16,000. This figure represents the opportunity cost of choosing not to sell the lathe, and it factors into the decision process along with operating and depreciation costs.
The first cost of keeping the old lathe, from an outsider's point of view and using a before tax analysis, is the current market value of the lathe which is $16,000. This value represents the opportunity cost of not selling the old equipment on the current market and can be seen as the initial investment into keeping the equipment. The concept of first cost includes more than just the purchase price; it also encompasses operating costs, like the cost of wood used in a lathe or the cost of gasoline in a car.
In this case, the choice is between continuing to operate the old lathe with its associated operating costs or purchasing a new lathe for $45,000, which might have different operating costs and efficiencies. If we consider the old lathe, we must account for the opportunity cost of not selling it ($16,000), as well as any additional maintenance, depreciation, and operating costs over the decision period.
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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
