Gustav Foods spent $1 million to investigate a potential new store and obtain the permits to build it. Should this expense be included when making the capital budgeting decision? Yes, it is a cost associated with the project. No, it is a sunk cost.

Gustav Foods spent $1 million to investigate a potential new store and obtain the permits to build it. Should this expense be included when making the capital budgeting decision? Yes, it is a cost associated with the project. No, it is a sunk cost.

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter11: Capital Budgeting Decisions

Section: Chapter Questions

Problem 5Q: Your supervisor is on the companys capital investment decision team that is to decide on...

See similar textbooks

Similar questions

Your supervisor is on the companys capital investment decision team that is to decide on alternatives for the acquisition of a new computer system for the company. The supervisor says, The book value of the existing computer system for the firm that we are considering replacing is nothing but an accounting amount and as such is irrelevant in the capital expenditure analysis. Does this reasoning make sense? Why or why not?
Calculate the Net present value of the replacement decision? At times firms will need to decide if they want to continue to use their current equipment or replace the equipment with newer equipment. The company will need to do replacement analysis to determine which option is the best financial decision for the company. Price Co. is considering replacing an existing piece of equipment. The project involves the following: The new equipment will have a cost of $1,800,000, and it will be depreciated on a straight-line basis over a period of six years (years1-6). The old machine is also being depreciated on a straight-line basis. It has a book value of $200,000 (at year O) and four more years of depreciation left ($50,000 per year). . The new equipment will have a salvage value of $0 at the end of the project's life (year 6). The old machine has a current salvage value (at year 0) of $300,000. Replacing the old machine will require an investment in net working capital (NWC) of $20,000…
A rental car company bought a new fleet of midsize cars and sold off its old midsize cars because they had too many miles on them. Which type of project would this be considered? An expansion project A replacement project What are sunk costs? Acme Manufacturing owns a warehouse that it is not currently using. It could sell the warehouse for $300,000 or use he warehouse in a new project. Should Acme Manufacturing include the value of the warehouse as part of the initial nvestment in the new project or treat the value of the warehouse as a sunk cost? Yes, include the value of the warehouse as part of the initial investment in the new project No, treat the value of the warehouse as a sunk cost The role of externalities A large soft-drink company currently produces regular cola and diet cola. It is considering introducing a new soft drink that tastes like regular cola but has zero calories like the diet cola. The new zero-calorie drink that tastes like egular cola is most likely to produce…
Assume that Rolando Corporation is considering the renovation and/or replacement of some of its older and outdated carpet-manufacturing equipment. Its objective is to improve the efficiency of operations in terms of both speed and reduction in the number of defects. The company’s finance department has compiled pertinent data that will allow it to conduct a marginal cost–benefit analysis for the proposed equipment replacement. The cash outlay for new equipment would be approximately $600,000. The net book value of the old equipment and its potential net selling price add up to $250,000. The total benefits from the new equipment (measured in today’s dollars) would be $900,000. The benefits of the old equipment over a similar period of time (measured in today’s dollars) would be $300,000. TO DO Create a spreadsheet to conduct a marginal cost–benefit analysis for Rolando Corporation, and determine the: 1. The marginal (added) benefits of the proposed new equipment. *
Assume that Rolando Corporation is considering the renovation and/or replacement of some of its older and outdated carpet-manufacturing equipment. Its objective is to improve the efficiency of operations in terms of both speed and reduction in the number of defects. The company’s finance department has compiled pertinent data that will allow it to conduct a marginal cost–benefit analysis for the proposed equipment replacement. The cash outlay for new equipment would be approximately $600,000. The net book value of the old equipment and its potential net selling price add up to $250,000. The total benefits from the new equipment (measured in today’s dollars) would be $900,000. The benefits of the old equipment over a similar period of time (measured in today’s dollars) would be $300,000. TO DO Create a spreadsheet to conduct a marginal cost–benefit analysis for Rolando Corporation, and determine the: 3. The net benefit of the proposed new equipment. *
Assume that Rolando Corporation is considering the renovation and/or replacement of some of its older and outdated carpet-manufacturing equipment. Its objective is to improve the efficiency of operations in terms of both speed and reduction in the number of defects. The company’s finance department has compiled pertinent data that will allow it to conduct a marginal cost–benefit analysis for the proposed equipment replacement. The cash outlay for new equipment would be approximately $600,000. The net book value of the old equipment and its potential net selling price add up to $250,000. The total benefits from the new equipment (measured in today’s dollars) would be $900,000. The benefits of the old equipment over a similar period of time (measured in today’s dollars) would be $300,000. TO DO Create a spreadsheet to conduct a marginal cost–benefit analysis for Rolando Corporation, and determine the: 2. The marginal (added) cost of the proposed new equipment. *
All equipment costs will continue to be depreciated on a straight-line basis. For simplicity, ignore income taxes and the time value of money. Q. Now suppose the one-time equipment cost to replace the production equipment is somewhat negotiable. All other data are as given previously. What is the maximum one-time equipment cost that TechGuide would be willing to pay to replace rather than upgrade the old equipment?
You are a manager at Percolated Fiber, which is considering expanding its operations. Your boss said to you "We already owe these consultants $1.8 million for their first report, and all they gave us is Net Income. Before we spend another $1.4 million on further market research plus $21 million on new equipment needed for this project, look the first report over and give me your opinion." Here are the report's estimates (in millions of dollars; note that the question is continued below, so you need to scroll down to see it all): 1 Sales revenue 64.0 64.0 64.0 - Cost of goods sold Gross profit -Selling, gen. & admin. exp. -Depreciation Net operating income - Income tax (30%) Net Income 41.0 41.0 41.0 23.0 23.0 23.0 8.8 8.8 8.8 7.0 7.0 7.0 7.2 7.2 7.2 2.2 2.2 2.2 5.0 5.0 5.0
A lodging property wishes to change its lighting system with the most efficient ones. The old system will be sold in the market and the new system will cost $500,000. The new investment does not require an additional outlay but it needs incremental working capital of $48,000. The old lighting system can be sold for $200,000 in the market which is an equivalent of its books value. Moreover, the new investment will not have incremental sales revenue but it will have incremental operating costs of $22,000, and incremental depreciation of $11,000 for the first year. There is no expected change in net working capital after the project is undertaken and no estimated salvage value for the first year. For the second year, suppose that there is 12.00% increase in operating costs and depreciation. At the end of the second year, the estimated salvage value is $10,000 on the new lighting system. What are the net investment and net cash flow for the first and second year for this investment (assume…
Otis Company is considering replacing equipment which originally cost P500,000 and which has P460,000 accumulated depreciation to date. A new machine will cost P790,000. What is the sunk cost in this situation?
Bangor Moving Company is thinking of opening a new warehouse, and the key data are shown below. The company owns the building that would be used, and it could sell it for $100,000 after taxes if it decides not to open the new warehouse. The equipment for the project would be depreciated by the straight-line method over the project's 3-year life, after which it would be worth nothing and thus it would have a zero salvage value. No new working capital would be required, and revenues and other operating costs would be constant over the project's 3-year life. What is the project's NPV? (Hint: Cash flows are constant in Years 1-3.) Project cost of capital (r)10.0%Opportunity cost$100,000Net equipment cost (depreciable basis)$65,000Straight-line deprec. rate for equipment33.333%Sales revenues, each year$123,000Operating costs (excl. deprec.), each year$25,000Tax rate25%
Sweeney Manufacturing has a plant where the equipment is essentially worn out. The equipment must be replaced, and Sweeney is considering two competing investment alternatives. The first alternative would replace the worn-out equipment with traditional production equipment; the second alternative uses contemporary technology and has computer-aided design and manufacturing capabilities. The investment and after-tax operating cash flows for each alternative are as follows: Year TraditionalEquipment ContemporaryTechnology 0 $(990,250) $(3,998,000) 1 591,150 192,500 2 394,650 398,750 3 209,100 591,550 4 209,100 801,600 5 209,100 801,600 6 209,100 801,600 7 209,100 1,007,000 8 209,100 1,991,100 9 209,100 1,991,100 10 209,100 1,991,100 The company uses a discount rate of 18 percent for all of its investments. The company's cost of capital is 14 percent. The present value tables provided in Exhibit 19B.1 and…