To expand sales, Sandine Corporation is evaluating whether to purchase a machine to manufacture a new product line. Which of the following statements is correct concerning an expansion analysis like the one Sandine faces?
A)The machine's annual depreciation expenses will be deducted from the firm's net income to calculate its supplemental operating cash flows.
B)The new machine will be acceptable as long as the sum of its net cash flows is positive.
C)The shipping and installation costs associated with purchasing the new machine are included in the computation of its initial investment outlay.
D)The cost of a feasibility study that Sandine conducted last year to determine whether to further evaluate the introduction of the new product line should be included in the calculation of the new machine's initial investment outlay.
E)The salvage value of the new machine should be included in the computation of its initial investment outlay.

Question

Quizplus · Accepted Answer

Shipping and installation costs associated with purchasing the new machine are considered as part of the initial investment outlay. The annual depreciation expenses will be considered in calculating the expenses but not while making a decision to purchase the machine. The new machine must generate a positive net cash flow, but this alone may not make it acceptable to the company. The cost of the feasibility study conducted last year is a sunk cost and is not relevant to the decision. The salvage value of the new machine is considered while calculating net present value or internal rate of return but not while calculating initial investment outlay.

To Expand Sales, Sandine Corporation Is Evaluating Whether to Purchase