week 4 - recorded lectures

Question 1

which of the following are to include in the capital budgeting?
- sunk costs
- opportunity costs
- externalities
- inception costs

Answer 1

• opportunity costs
• externalities
• inception costs

Question 2

which cash flow are to include in the capital budgeting?

Answer 2

-> relevant
-> incremental

Question 3

Alpha, a retailer in sports
goods, has traditionally sold
their products in stores is now
examining the viability of selling
online. They are aware of the
fact that some of the cash flows
generated by online sales will
be derived from customers who
previously purchased at the
stores. Shall these “transfer”
cash flows be included as part
of the cash flows for the
purposes of evaluating this
project?

Question 4

Oasis Plc is considering
expanding its business
operations into a new
product line which will
require purchase of new
machinery. The price of
machinery is £375,000 while
Oasis will have to incur some
shipping and installation costs
of £20,000. Shall the firm
include shipping and
installation cost in capital
budgeting?

Answer 4

YES, it is an inception cost
Shipping and installation costs
are “effectively” part of the cost
of the machinery because the
firm cannot use the asset until it
is received, installed, and made
operational

Question 5

Carsley plc is looking into a
new business project and will
need additional office space if
the project is undertaken.
Company has an empty
warehouse having a market
value of £250,000 that it is
considering converting into
office space for the new
project. Shall Carsley use
£250,000 in capital budgeting
of new project?

Answer 5

YES, it is a opportunity cost

Question 6

Forks, a local food chain, is
evaluating opportunity to open
a new food outlet in another
town. Forks is not familiar with
the market in new town and
hired services of a business
consultant who will perform
market feasibility study and
will charge £5000. Shall Forks
include consultancy cost of
feasibility study while
performing capital budgeting
analysis of investment
opportunity?

Answer 6

NO, it is a sunk cost
The £5000 shall not be included
in the capital budgeting because
must be paid even if the firm
decides it should not pursue the
idea further after reviewing the
completed feasibility study.