Question

The project will require an initial investment of $20,000, but the project will also be using a company-owned truck that is not currently being used. This truck could be sold for $12,000, after taxes, if the project is rejected. What should Garida do to take this information into account? A.The company does not need to do anything with the value of the truck because the truck is a sunk cost.B. Increase the NPV of the project by $12,000. C.Increase the amount of the initial investment by $12,000.

Answer 1

The value of the company-owned truck represents an implicit cost and should be included in the initial investment as an opportunity cost, increasing the initial investment by $12,000 for the NPV calculation.

Step-by-step explanation:

When considering the company-owned truck in the context of investment analysis, it's important to take into account opportunity costs. The truck represents an implicit cost to the project, as it can be sold for $12,000 if the project is rejected. This potential income is forgone by using the truck in the new project. Therefore, the correct approach would be to increase the initial investment by $12,000 to reflect the opportunity cost of not selling the truck. This is essential for accurately calculating the project's Net Present Value (NPV), which should include all relevant costs and revenues to determine if the project will create value for the company. By increasing the initial investment, Garida is considering the opportunity cost of not selling the truck. This way, the project's financial analysis will reflect the value of the truck as part of the investment. Therefore, the correct option is C. Increase the amount of the initial investment by $12,000.

Answer 2

Increase the amount of the initial investment by $12,000 (C)

Step-by-step explanation:

Option A- False. It is not a sunk cost but a relevant cost because it has a disposal value and there is market for the sale.

Option B-False. The NPV of the project will be reduced by $12,000 because it is a relevant cost and the disposal value will reduce the NPV of the project .

Option C- True. Because truck could have been sold for $12,000 if not use in the project, the disposable value will have to be added to the initial cost of the investment.