Question

A successful sushi chain in Hong Kong spent $500,000 to conduct a study on whether to open a location in the United States. The study showed that the best place for the company to open its first location would be in Chicago. When conducting its capital budgeting analysis, how should the company account for the cost of the study when estimating the amount of the initial investment that the new store will require?

A. The company should include the cost of the study in the amount of the initial investment.
B. The company should ignore the cost of the study
C. The company should include half of the cost of the study in the initial investment.

Answer 1

B. The company should ignore the cost of the study

Step-by-step explanation:

Capital budgeting analysis is a finance technique that businesses use to determine the viability of a project or a venture. The methods of capital budgeting analysis involve the use of projected future incomes and expenses to gauge a project profitable.

The cost of the study should not be included because it does not affect the future inflows of the projects. The formula for capital budgeting consider estimated future inflows and expenses but not past costs. The cost of the study is an overhead expense and not a direct expense of the project.