Covol Industries is developing the relevant cash flows associated with the propo

Question

Covol Industries is developing the relevant cash flows associated with the proposed replacement of an existing machine tool with a new, technologically advanced one. Given the following costs related to the proposed project, explain whether each would be treated as a sunk cost or an opportunity cost in developing the relevant cash flows associated with the proposed replacement decision.EXPLAIN***** (a.) Covol would be able to use the same tooling, which had a book value of $40,000, on the new machine tool as it had used on the old one. (b.) Covol would be able to use its existing computer system to develop programs for operating the new machine tool. The old machine tool did not require these programs. Although the firm

Explanation / Answer

Hi, Please find the answers as follows: a) This is a sunk cost and is not relevant to the project's cash flows. b) The amount of 17000 is an opportunity cost and is treated as relevant. If the firm chooses the project, it will have to forego 17000 in leasing revenue. c) 10000 in floor space is an opportunity cost. The firm will have to forego 10000 in revenues in order to provide floor space for the new project. d) The storage space is a sunk cost and it will not be charged to the new project. e) Foregoing the sale of the crane is an opportunity cost. The 180000 in lost equipment sales revenue should ideally be charged to the new project. Thanks Aman

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