Laural Inc. is a household products firm that is considering developing a new de
ID: 2625089 • Letter: L
Question
Laural Inc. is a household products firm that is considering developing a new detergent. In evaluating whether to go ahead with the new detergent project, which of the following statement is MOST correct?
a. The company will produce the detergent project in a building that they already own. The cost of the building is therefore zero and should be excluded
b. The company will nedd to use some equipment that it could have leased to another company. This equipment lease could have generated $200,000 per year in after-tax income. The $200,000 should be excluded because the equipment can no longer be leased.
c. The company will need to hire 10 new workers whose salaries and beneficts will total $400,000 per year. Labor costs are not part of capital budgeting and should be excluded.
d. The company will produce the detergent in a building that is renovated 2 years ago for $300,000. The $300,000 should be excluded from the analysis.
Explanation / Answer
The most correct choice is a.
choice b is incorrect as lease can be treated as an alternative project, and the detergent should be produced only if it can produce more than 200K per year
choice c is incorrect as labor costs will be part of the analysis
choice d is incorrect as the renovation cost will have to be included as it will become part of the fixed costs.
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