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Sir there is a question i have doubt in
An existing machine is to be used in a project which had a cost of 100000 and book value of 50000 and a replacement cost of 200000
The sales value if not used in the project will be 100000( and the replacement would be purchased).what is the relevant cost??
In this i get that the answer will be -100000(sales proceeds foregone)
But what if the sales value would have been 200000….in this case what i believe is that the relevant cost would have been
1) if not sold: -200000
2) if sold( then new replacement would have been purchased): -200000+200000=0
So in this case the relevant cost would be 0 as the replacement would have been cheaper optionYou have to understand we can not keep answering your questions like this. You change a question to clarify your understanding. Watch the lectures, work through the notes. You are one of many who access our help.
However, in answer to your questions
The relevant cost in this case would be -$100,000 (sales proceeds foregone) because if the existing machine is used in the project, it would not be sold and the sales value of $100,000 would be foregone.
The replacement cost of $200,000 is not relevant in this context as it is not incurred if the existing machine is used. Therefore, the relevant cost is the opportunity cost of not selling the machine.
In the scenario, if the sales value of the existing machine would have been $200,000, then the relevant cost would be as follows:
1) If not sold: -$200,000 (sales proceeds foregone)
2) If sold (and a new replacement machine purchased): -$200,000 (sales proceeds foregone) + $200,000 (cost of replacement machine) = $0
Ok sir i am sorry
So in the second scenario
If the question asks what is the relevant cost of project
Then the answer would be zero( as they will opt for cheaper option)As I have said above already
1) If not sold: -$200,000 (sales proceeds foregone)
2) If sold (and a new replacement machine purchased): -$200,000 (sales proceeds foregone) + $200,000 (cost of replacement machine) = $0
Therefore, in this case, the relevant cost would be $0, as purchasing a new replacement machine would have been the cheaper option.
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