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  1. I have a question regarding the relevant cost of materials . As mentioned in the question “the materials have just been purchased” . This in a way gives us a hint that the materials are actually purchased for the project . However we are not considering their cost as relevant when they are in fact purchased solely for the project . Guide please ?

  2. firstly thanks for the wonderful lectures. I would to know if I am right on my understanding of the reason why we should not include the sunk cost in our calculation to make a decision. how I understand is we would like to know whether if we carry on the project from this position we are now would result positive/negative outcome. so we would say in the case of positive outcome it would reduce the impact of any sunk cost whereas if it is negative it would increase the cost further and we reject the project. am I right there?
    thank you.

  3. While deciding whether to accept or decline the project, we’re just considering the additional relevant cost. Shouldn’t the already incured costs of 拢150,000 also be considered while determining if the project is profitable or not?

  5. Thank you for the lecture. Will there be a difference in decision making if the amount saved on disposal ($5000) is added to cash inflow instead of subtracting it from outflows. What other effect will this have on our calculation. Thank you.

  8. Wonderful lecture as always. Just a small question Sir. I know when dealing with Statement of Cash flows, the treatment of disposal gains or losses uses the same logic as depreciation. Would it be far fetched to think the same should be extended to determining if said expected gains or losses are relevant? specifically, shouldn’t the 2000 disposal value lost be irrelevant?

    Many thanks

  11. Hello John,

    I have a problem as In cash outflow coloumn you marked saved in disposal and saved in material in negative and lost in rent and lost in sales 150,000 as positive as what I understand is I not doing the project materials can be disposed off for 5000 so Could you explain me why you are not considering material as opportunity cost .

    • We are listing the total cost. So, for example, the extra wages needed are a cost and so are shown as positive in the list.

      There is a saving on materials (because if we use them in the contract we will not have to pay for their disposal, so we will save 5,000). Because it is a saving, it is shown as a negative cost – it reduces the total cost.

      Lost rent (for example) is a cost and therefore it is an extra cost and therefore included in the total of costs.

  12. Sir Moffat,

    The wrong lecture of inflation(example 1) starts here instead of Relevant Cash Flows for DCF Inflation (example 4).

    Could it be sorted ASAP please?

    Love all your lectures

    Thanks 馃檪

    • The materials are toxic and if we do not use them in the contract we will have to pay to dispose of them.

      If we use them on the contract then we will not dispose of them and therefore will save the cost of disposing of them.

      • the materials of 40000 included in the prime cost is the same as the toxic materials of 40000?

      • There are no materials of $40,000 in the prime cost (and they are not the same materials!).

        You did not say which materials you were asking about – the only materials needed for the contract are those under the heading ‘materials’ and they are what my answer here was referring to.

        It seems you are actually asking about the relevant cost of the labour used. Because they are being moved from other work there is the opportunity cost of $90,000 of moving them. You can get the same answer two ways – whichever is more obvious to you – either it is the cost of labour (40,000) plus the lost contribution (150,000 – 100,000 = 50000).
        Alternatively, if you find it more obvious, if we stop the other production then we lose the sales (150,000). However if we are not producing the other product we do not need to spend the money on the materials for the other product (60,000 (100,000 – 40000)). So the net cost is 150,000 – 60,000 = 90,000.

  15. Hi John. Shouldn’t we discount the redundancy cost that will be incurred in a years time rather than subtract it from the redundancy cost if we were to discontinue the project?

    • That would be fine, except that this example specifically says (the last line) to ignore the time value of money (which means to not discount).
      This first example is just a check on relevant costs.

  19. Thank You! A great lecture! 馃檪
    But I have 2 questions.
    1. If we have to rent the premises specifically for this project, then do we consider it as a relevant cost?
    2. Why don’t we consider $ 40,000 Labour cost as a relevant cost. I get the point why we don’t consider it when we calculate Loss from the other products. But why don’t we take it to account for this project seperately?

    • If we did rent premises specifically, then we would include them (but we don’t in this question).

      With regard to the labour, we will be paying them whether we move them to this project or whether they stay where they are – there is no extra cost involved.

      • Thanks alot! 馃檪
        I asked about the question regarding premises in case we don’t come across a question with that point in the examples.

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