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Capital Budgeting

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA MA – FIA FMA › Capital Budgeting

  • This topic has 3 replies, 2 voices, and was last updated 4 years ago by John Moffat.
Viewing 4 posts - 1 through 4 (of 4 total)
  • Author
    Posts
  • November 7, 2020 at 2:01 pm #594363
    applessauce
    Member
    • Topics: 85
    • Replies: 65
    • ☆☆

    Sir I have a problem with the following question

    A company is planning to open a new store in a new geographic location.An initial site evaluation has taken place at a cost of $5000 and a store location has been found.The new store can be rented for $9500 per annum.It will require refurbishment at a cost of $320,000

    Which of the following costs are relevant for an NPV calculation?

    1) $5,000
    2) $9,500
    3) $320,000

    Sir the answer in the book said 2)&3)

    My doubt is why can’t all of them be the answer
    They said that they are evaluating the initital cost but they never said that they have already bought the land
    The question seems to say that they are also planning to open a new store

    However, the book answer says that $5,000 is already a cost incurred in the business and is a sunk cost
    How is this possible sir
    They haven’t even told that the land is bought
    They just said it is being ‘evaluated’

    If it is being evaluated it means they haven’t come to a decision yet ryt and it is being planned for the future

    So I thought all of them are future costs but the book says that the 5000 is already a cost borne

    Sir please help me clear this confusion and explain how the book came up to a decision to assume that the 5000 was already a sunk cost

    Thank you

    November 7, 2020 at 2:07 pm #594366
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    The question says “the initial site evaluation has taken place” – therefore it has already happened and it is not that it is currently being evaluated. Therefore the $5,000 is payable whether or not they open the store.

    (And there is no mention of buying any land. They are renting the store! )

    November 7, 2020 at 2:16 pm #594367
    applessauce
    Member
    • Topics: 85
    • Replies: 65
    • ☆☆

    Oh alright thank you sir

    November 8, 2020 at 9:56 am #594401
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    You are welcome 🙂

  • Author
    Posts
Viewing 4 posts - 1 through 4 (of 4 total)
  • The topic ‘Capital Budgeting’ is closed to new replies.

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