Bellington, Inc is considering the purchase of new, sophisticated machinery for a special
three-year project.
The machinery requires a special lubricating oil that probably will never be
used, but must be available at all times should the machine break down. Bellington purchases
$2,000 of lubricating oil to keep on hand just in case it is needed. At the end of the three-year
project, it is expected the lubricating oil can be sold back to the distributor for $2,000. Which of the
following statements is MOST correct?
A) The $2,000 represents an additional investment in working capital that should be included in
the capital budgeting analysis.
B) The $2,000 for the lubricating oil should be excluded from the analysis because it is recovered
at the end of three years, so the final cost is zero.
C) The $2,000 for lubricating oil is simply an accounting entry and does not represent a real cash
flow.
D) The lubricating oil is a sunk cost that should be excluded from the analysis.
A
You might also like to view...
When is it advisable to predominantly use sales promotion in a promotional mix?
What will be an ideal response?
The power that gives you the ability to influence someone with something of value is:
A) Information power B) Connection power C) Charismatic power D) All of the above E) None of the above