Asked by Marlon Amador on Jul 25, 2024
Verified
Which of the above costs are not relevant to the comparison of the alternatives
A) Salvage value at the end of 8 years.
B) Annual cash operating costs.
C) Purchase cost new.
D) Overhaul costs needed year 4.
Incremental Cost Approach
The incremental cost approach involves analyzing the additional costs incurred when increasing the production or scope of a project to determine if the benefits outweigh the costs.
Discount Rate
The rate utilized to calculate the present value of upcoming cash flows in a discounted cash flow analysis process.
Salvage Value
The estimated residual value of an asset after its useful life has ended and it can no longer be used for productive purposes.
- Differentiate between relevant and irrelevant costs in investment analysis.
Verified Answer
GM
Glorious MomentsJul 30, 2024
Final Answer :
C
Explanation :
The purchase cost new is not relevant to the comparison of the alternatives because both Machine A and Machine B have the same purchase cost of $300,000. This makes the initial purchase cost a sunk cost and irrelevant for the incremental cost analysis between the two options.
Learning Objectives
- Differentiate between relevant and irrelevant costs in investment analysis.