K firm own a drilling rig that purchased for $10 million. The life of a drilling rig is 10 years, and your accountants use straight-line depreciation. Its the start of the year, and the current market value of the rig is $6 million, so you can sell it to another driller for $6 million. If you sell the rig, you can use the funds in an investment that returns a profit of 10%. Alternatively, you can rent the rig using a triple net lease to another developer for this year for $1.1 million. At the end of the year, the rig will be worth $5.5 million.

a. what is the depreciation allowance?

b. What is your opportunity cost if your firm uses the rig?

c. What is the true cost to your firm of using the rig?