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Machinery owned by a company is not currently in use but could be used on a short-term contract. The net book value of the machinery is 2000 . If it is not used on this new contract, the machinery could be sold for 2000. After use on the contract, there would be no resale value and the cost of disposal would be 900.
What is the relevant cost of the machinery to the contract?
A) 2000
B)3100
C)2200
D)1300
Explain please ..If the contract is not undertaken the machinery could be sold now for 2000: a cash inflow. (NBVs and historical costs are irrelevant in decision making.)
If used on the contract there is no resale, but a cost of 900: A cash outflow.
The difference in cash flows is 2900 so that is the relevant cost: the change in cash flow caused by the decision.
So either all of the proffered answers are wrong or you have mistyped a figure in your query.
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