The project will require an initial investment of $20,000, but the project will also be using a company-owned truck that is not currently being used. This truck could be sold for $12,000, after taxes, if the project is rejected. What should Garida do to take this information into account? A. The company does not need to do anything with the value of the truck because the truck is a sunk cost. B. Increase the NPV of the project by $12,000. C. Increase the amount of the initial investment by $12,000.

Question

Business

Rashad Waters

7 October, 21:43

The project will require an initial investment of $20,000, but the project will also be using a company-owned truck that is not currently being used. This truck could be sold for $12,000, after taxes, if the project is rejected. What should Garida do to take this information into account? A. The company does not need to do anything with the value of the truck because the truck is a sunk cost. B. Increase the NPV of the project by $12,000. C. Increase the amount of the initial investment by $12,000.

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Abel Baker · Answer 1

Increase the amount of the initial investment by $12,000 (C)

Explanation:

Option A - False. It is not a sunk cost but a relevant cost because it has a disposal value and there is market for the sale.

Option B-False. The NPV of the project will be reduced by $12,000 because it is a relevant cost and the disposal value will reduce the NPV of the project.

Option C - True. Because truck could have been sold for $12,000 if not use in the project, the disposable value will have to be added to the initial cost of the investment.