Question

tradar Company spent $5 million two years ago to build a plant for a new product. It then decided not to go forward with the project, so the building is available for sale or for a new product. Tradar owns the building free and clear--there is no mortgage on it. Which of the following statements is CORRECT? a. Since the building has been paid for, it can be used by another project with no additional cost. Therefore, it should not be reflected in the cash flows of the capital budgeting analysis for any new project. b. If the building could be sold, then the after-tax proceeds that would be generated by any such sale should be charged as a cost to any new project that would use it. XXXc. Since the building was built in the past, its cost is a sunk cost and thus need not be considered when new projects are being evaluated, even if it would be used by those new projects. e. If there is a mortgage loan on the building, then the interest on that loan would have to be charged to any new project that used the building.

Answer 1

The correct statement in this scenario is:

c. Since the building was built in the past, its cost is a sunk cost and thus need not be considered when new projects are being evaluated, even if it would be used by those new projects.

Step-by-step explanation:

A sunk cost is a cost that has already been incurred and cannot be recovered. In this case, the $5 million spent to build the plant is a sunk cost because it was incurred in the past and cannot be retrieved.

When evaluating new projects, sunk costs should not be considered. The reason is that these costs are not relevant to the decision-making process. The focus should be on the future costs and benefits of the new project.

Therefore, even if the building is used for a new project, the cost of constructing the building should not be included in the cash flows or considered when evaluating the profitability of the new project. The cost of the building has already been incurred and is irrelevant to the decision at hand.

It's important to note that this answer assumes that there are no ongoing costs associated with the building, such as maintenance or property taxes. If there are any such costs, they should be considered in the analysis.

Step-by-step explanation:

Answer 2

The building cost is a sunk cost and should not be considered in the evaluation of new projects. The correct statement is option c.

Step-by-step explanation:

The correct statement is option c. Since the building was built in the past, its cost is a sunk cost and thus need not be considered when new projects are being evaluated, even if it would be used by those new projects.

Sunk costs are costs that have already been incurred and cannot be recovered. They are irrelevant for decision-making because they cannot be changed by any future actions. In this case, Tradar Company spent $5 million to build the plant, but since the project was abandoned, the cost of the building is considered a sunk cost.

Therefore, when evaluating new projects, the cost of the building should not be included in the cash flows of the capital budgeting analysis. Instead, only relevant costs and benefits that can be affected by the new project should be considered.