You are a social media business with excess capacity of 50% on your computer server; if you stay with your existing business, you will not run out of capacity until the end of year 7. You are considering introducing a new service that will use some of the excess capacity, but cause you to run out of capacity at the end of year 3. If the cost of adding a new server is $ 60 million (you can assume no inflation), what is the opportunity cost of using the excess capacity? (You have a cost of capital of 12%, a marginal tax rate of 35% and you can assume that you can expense the cost of the server.) 

Answer rating: 100% (QA)

The opportunity cost of using the excess capacity can be calculated by comparing the present value of the cash flows associated with staying with the ... View the full answer