7211TutAnswersWk9_109

7211TutAnswersWk9_109 - 8-7 Sunk costs and opportunity...

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Unformatted text preview: 8-7 Sunk costs and opportunity costs $3.5 billion already spent – Sunk cost (irrelevant) $350 million incremental cash outflow – Relevant cash flow $15 million per year cash inflow – Relevant cash flow $450 million for satellites – Opportunity cost and relevant cash flow Should Iridium Ltd make the investment? 8-9 Sunk costs and opportunity costs a. Sunk cost - Since the funds for the tooling had already been expended and would not change no matter whether the new technology would be acquired or not. b. Opportunity Cost - The development of the computer programs can be done without additional expenditures on the computers; however, the loss of the cash inflow from the leasing arrangement would be a lost opportunity to the firm. c. Opportunity Cost - Covol will not have to spend any funds for floor space but the lost cash inflow from the rent would be a cost to the firm. d. Sunk cost - The money for the storage facility has already been spent and no matter what decision the company makes there is no incremental cash flow generated or lost from the storage building. e. Opportunity Cost - Forgoing the sale of the crane costs the firm $180,000 of potential cash inflows. 8-16 Calculating initial investment Initial investment = Purchase price + Installation costs – After tax proceeds from sale of old asset + Change in net working capital = $55,000 + $7,500 – $35,000 + $11,250 + $2,000 = $40,750 8-22 Incremental operating net cash inflows a. Incremental earnings before tax and depreciation = $1,200,000 – $480,000 = $720,000 b. Depreciation on new machine = $1,900,000 + $100,000 = $400,000 5 Net profit before tax = $720,000 – $400,000 = $320,000 less Tax = $320,000 × 0.40 = $128,000 Net profit after tax $192,000 c. Incremental operating net cash inflow = $192,000 + $400,000 = $592,000 ...
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7211TutAnswersWk9_109 - 8-7 Sunk costs and opportunity...

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