- This topic has 12 replies, 3 voices, and was last updated 2 years ago by
.
- Posts
Sir for any investment appraisal technique(EXCEPT FOR ROCE) will we include sunk or committed cost in initial investment value?
For example if research cost of 8000 has been incurred, it this included in initial investment?
First may I start by saying that all 3 of your questions can be answered by watching our free lectures.
They cover everything needed to pass the paper well.‘Golden Rule’ which states that to be included in a cash flow table an item must be a future, incremental cash flow.
Irrelevant items to look out for are sunk costs such as amounts already spent on research and apportioned or allocated fixed costs.
Equally all financing costs should be ignored as the cost of financing is accounted for in the discount rate used.
First may I start by saying that all 3 of your questions can be answered by watching our free lectures.
They cover everything needed to pass the paper well.‘Golden Rule’ which states that to be included in a cash flow table an item must be a future, incremental cash flow.
Irrelevant items to look out for are sunk costs such as amounts already spent on research and apportioned or allocated fixed costs.
Equally all financing costs should be ignored as the cost of financing is accounted for in the discount rate used.
So sir if we use an already purchased machinery in a new project,then the initial investment can be possibly zero as the machine already purchased will be a sunk cost
First may I start by saying that all 3 of your questions can be answered by watching our free lectures.
They cover everything needed to pass the paper well.So no the investment appraisal is usually about seeing whether buying the asset gives a positive return.
You have your PM head on!!
Sir i am sorry i didn’t get it….if we are given a question where
A machine A of 50000 is to be purchased for a project
A machine B of 5000 as already been purchased 2-3 years ago and is to be used in the same project
The initial investment will be only 50000…right?No. It depends what would be done with Machine B if they didn’t go ahead with the new project.
Presumably they would either sell Machine B (in which case we would include the lost sale proceeds) or it is earning money which would lost in the future (in which case we would include the lost future earnings).
Yes i got that but in case no other information is given the initial investment will NOT include it right?
For example
This is an already purchased machine of 50000 and it is to be used in a new project….the scrap is going to be nil
In this case the initial investment can be possibly zero right in case of no other information as the already purchased machine is a sunk cost?The 50,000 itself is a sunk cost and is not relevant.
It is not realistic that it should have a current sale value of zero and yet be used for a new project. If it is capable of being used in a new project then it must be capable of earning money if the new project was not undertaken, or alternatively it must have a sale value (if it is worth nothing then it must be useless and therefore would not be used for the new project unless they were going to spend money repairing it, in which case the money to be spent would be relevant).
This could not be the case in real life and certainly not in exam questions either.
Okay a little change
An already purchased machinery of 50000
Scrap value 20000
Used in a project
For this particular project only 20000 Will be relevant right?
- You must be logged in to reply to this topic.