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A company is about to make a decision on whether to purchase a new machine in order to expand production. A feasibility study has already been conducted but not yet paid. The company uses NPV to evaluate new investments.
What of the following is relevant cost for calculating the NPV of the new Machine ?1) The finance directors current salary
2) Depreciation on the new machine
3) Installation cost of the Machine
4) The cost of the feasibility study.Sir kindly tell me that which of the above is correct as relevant cost and short reason please.
Why are you attempting a question for which you do not have an answer? You should be using a Revision Kit from one of the ACCA Approved Publishers – they have answers!!
For NPV investment appraisal, we are only concerned with future, extra cash flows arising from the investment.
1. The salary is not relevant because the director will still be paid whether or not the machine is invested in.
2. Depreciation is not relevant because it is not a cash flow.
3. The installation cost is relevant because it is a future cost that will only be incurred if they buy the machine.
4. The feasibility study is not relevant because this has already taken place and so the cost has been incurred whether or not they buy the machine.
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