Alloy Corp. is considering the acquisition of a new processing line. The process

Question

Alloy Corp. is considering the acquisition of a new processing line. The processor can be purchased for $4,550,000. It will cost $65,000 to ship and $190,500 to install the processor. A recently completed feasibility study that was performed at a cost of $45,000 indicated that the processor would produce a positive NPV. Studies have shown that employee-training expenses will be $150,000. What is the total investment in the processing line for capital budgeting purposes?

a. $4,955,500

b. $5,000,500

d. $4,550,000

Explanation / Answer

The relevant costs to consider are purchase cost (4,550,000) + shipping (65,000) + installation (190,500) + employee training (150,000). We should NOT include feasibility study cost as the cost is already incurred and will not be incurred in future.

So total relevant investment = 4,550,000 + 65,000 + 190,500 + 150,000 = 4,955,500

So answer is choice (a): $4,955,500

Hope this helped ! Let me know in case of any queries.

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