Question

1. Which of the following is not a complication for capital budgeting​ analysis?

A.Externalities B.Sunk costs C.Opportunity costs D.Indirect costs E.Dual costs

2. Which of the following is not an approach for comparing projects with unequal​ lives?

A.Standard Life B.Equivalent Annual Annuity    C.Replacement Chain

3. When evaluating a new​ project, the firm should consider all of the following factors EXCEPT

A.previous expenditures associated with a market testing.

B.the current market value of any equipment to be replaced.

C.the resulting difference in depreciation expense if the project involves replacement.

D.changes in working capital attributable to the project.

Answer 1

1: Dual costs

When these are dual costs associated with the project, there is no complication since it has to betaken only once into account. The other costs are assessed carefully and hence increase the complications involved.

2: A standard life

We can use equivalent annuity method which gives the annuity every year. We can also use the replacement chain method where the machinery is replaced at the end of its life.

3: A

This is sunk cost and hence not considered. Part b is opportunity cost and to be considered for decision making. Part c is a cash flow and part d is also direct change in cash flows. This needs to be compared.