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A project being considered would require a machine costing $80,000 which is expected to be scrapped at the end of the project for $4,000. Market research of $8,000 has already been carried out and capitalised as an asset. The project is expected to last for six years and generate net cash inflows of $20,000 for each of the first three years and $15,000 for each of the last three years. Assume that cash flows arise evenly during the year.
Required:
Evaluate the project using:
(i) ROCE;
(ii) ROCE using the average investment approach;
(iii) Payback period.
this is question from ACCA study hub – i am little confused regarding the market research – why it is captitalised in the first place and in the calculation the add to the depreciation and also to the investment would you kindly explain how should be treated and if the question has change for example they only mentioned the market research with mentioned that it has been capitalized should i include it in the calculation ?
While market research costs are capitalised, they should not be included in cash flow calculations for project evaluation.
They are considered to provide future economic benefits.
Once the market research has been conducted and the cost incurred, it becomes a sunk cost and is irrelevant to future decision-making regarding the project.On the other hand Depreciation is added back because it does not represent a cash outflow.
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