CFA Practice Question

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CFA Practice Question

A firm owns a building with a book value of $100,000 and a market value of $250,000. If the building is utilized for a project, then the opportunity cost ignoring taxes, is ______.
A. $100,000
B. $150,000
C. $250,000

User Contributed Comments 8

User Comment
zack ?? can someone explain ?
examinee The opportunity cost of using the building is 250000 and hence that is what we use. Alternatively it could have been sold for 250,000.
Cata Don't agree. The opportunity cost should be the actuals revenue the building provides, not the sale value, as the problem doesn't specify the imminent sale of the building, or that the firm could either use or sale.
mtcfa The immediate opportunity cost is the $250k. The answer is correct.
mansi opportunity cost is the money earned on the next best investment
sunilkumar opportunity cost is nothing but Best oppurtunity foregone. so 2,50,000
phillyj 100,000 is a sunk cost. So its not included in the decision.
ascruggs92 Cata, although imminent sale is not specified, the fair market value is, by definition, what it can be sold for.

Opportunity cost is simply the next best use of an asset. Since we are aware that the building can be sold for its FMV, that is what has to be used for the opportunity costs.
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