Question

Sunk costs and opportunity costs Masters Golf Products, Inc., spent 2 years and $1,160,000 to develop its new line of club heads to replace a line that is becoming obsolete. To begin manufacturing them, the company will have to invest $1,850,000 in new equipment. The new clubs are expected to generate an increase in operating cash inflows of $752,000 per year for the next 14 years. The company has determined that the existing line could be sold to a competitor for $254.000 a. How should the $1,160,000 in development costs be classified? b. How should the $254,000 sale price for the existing line be classified? c. What are all the relevant cash flows for years 0 thru 14? (Note: Assume that all of these numbers are net of taxes.) a. How should the $1,160,000 in development costs be classified? (Select the best answer below.) O A. The $1,160,000 development costs should not be considered part of the decision to go ahead with the new production. This money has already been spent and cannot be retrieved so it is a sunk cost O B. The $1,160,000 development costs should not be considered part of the decision to go ahead with the new production. This money has already been spent and cannot be retrieved so it is an opportunity cost O C. The $1,160,000 development costs should be considered part of the decision to go ahead with the new production. This money has already been spent as part of the investment project. O D. The $1,160,000 development costs should be considered part of the decision to go ahead with the new production. This money has already been spent as part of the opportunity cost of the project Click to select your answer and then click Check Answer parts remaining Clear All Final Check

Answer 1

a.A.Should not be considered, sunk cost

b.Should be considered as it is an opportunity cost

c.Relevant cash flows = $752000