Question

Mercedes Benz is evaluating a capital (budgeting) project that would involve building a factory in North Carolina that makes electric cars. The current factory in this area makes traditional gas powered autos This type of capital project could be characterized by management as a/an _____ .

1) replacement decision

2) expansion decision

3) mutually exclusive decision.

4) maintenance decision

5) All of the above.

Answer 1

Major capital budgeting decision includes...

• Expansion
• Acquisition
• Modernization
• Replacement
• New product investment etc....

Replacement decision: Decision-related to the replacement of an existing asset with another is based on the present value and rate of return. That is expected to lower current production costs and/or increase current sales.

Expansion decision: These are projects where the firm seeks to profitably increase sales of current products or introduce new products into the market. The new product can be or cannot be related to the previous product.

Mutually exclusive decision: These are decisions where the company has to choose one over another or one out of two or more projects.

For example, assume a company has a budget of $100,000 for expansion projects. If available Projects X and Y each cost $40,000 and Project Z costs only $10,000, then Projects X and Y are mutually exclusive. If the company pursues X, it cannot also afford to pursue Y and vice versa. Project Z, however, is independent. Regardless of which other project is pursued, the company can still afford to pursue Z as well. The acceptance of either X or Y does not impact the viability of Z, and the acceptance of Z does not impact the viability of either of the other projects.

Maintenance decision: Maintenance decision generally supports to maintain the status of the business as usual and keeps revenue stream floating.

After looking at all the explanation we can say that Mercedes Benz is nor replacing its current building or production. neither closing current building or production. However, they are adding new verticals to their business so, we can consider this as an Expansion decision.

Answer: 2.) Expansion Decision