Covol Industries is developing the relevant cash flowsassociated with the propos
ID: 2770826 • Letter: C
Question
Covol Industries is developing the relevant cash flowsassociated with the proposed replacement of an existing machinetool with a new, technologically advanced one. Given the followingcosts related to the proposed project, explain whether each wouldbe treated as a sunk cost or an opportunity cost in developing therelevant cash flows associated with the proposed replacementdecision.
a. Covol would be able to use the sametooling, which had a book value of $40,000, on the new machine toolas it had used on the old one.
b. Covol would be able to use its existingcomputer system to develop programs for operating the new machinetool. The old machine tool did not require these programs. Althoughthe firm's computer has excess capacity available, the capacitycould be leased to another firm for an annual fee of $17,000.
c. Covol would have to obtain additionalfloor space to accommodate the larger new machine tool. The spacethat would be used is currently being leased to another company for$10,000 per year.
Explanation / Answer
a Opportunity Cost b Opportunity Cost c Opportunity Cost d Sunk Costs