1. The value of currently unused warehouse space that will be used as part of a
ID: 2630673 • Letter: 1
Question
1. The value of currently unused warehouse space that will be used as part of a new capital budgeting project is
an opportunity cost.
a sunk cost.
irrelevant to the investment decision.
an overhead expense.
2. Consider a project with the following cash flows:
-10,000
4,000
4,000
4,000
4,000
If the appropriate discount rate for this project is 15% p.a. compounded annually, then the NPV is closest to:
-$867
$6,000
$1,420
$867
an opportunity cost.
a sunk cost.
irrelevant to the investment decision.
an overhead expense.
Explanation / Answer
1. The value of currently unused warehouse space that will be used as part of a new capital budgeting project is
a sunk cost. Because they already own the warehouse and it is being paid for regardless of the decision of whether or not to proceed with the capital project.
2. If the appropriate discount rate for this project is 15% p.a. compounded annually, then the NPV is closest to:
$1,420
To find this, calculate Present Value (PV) using i = .15, n = 4 (number of compounding periods) and A = $4000 payments.
Doing this, we get a present value of $11,420.
NPV = -10,000 + 11,420 = $1420
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