Six years ago, Alex Industries paid cash for a new milling machine that cost $69

Question

Six years ago, Alex Industries paid cash for a new milling machine that cost $69,000. Three years ago, the firm spent $6,200 on repairs and modifications to the machine. The machine is now fully depreciated and has just sat idly in a back corner of the shop for the past 18 months. The estimated value of the machine today is $18,600. The firm is considering using this machine in a new project. If it does so, what value should be assigned to this machine and included in the initial costs of the project

Explanation / Answer

While doing project evaluation, all relevant cash flows must be considered. Irrelevant cash flows must not be considered project evaluation.

Costs incurred in the past are sunk costs and does not irrelevance in project evaluation. Opportunity loosed cash flows from sale of machine are relevant cash flows.

Hence, initial cost must be considered is $18,600.

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