Page 423 - Microsoft Word - 00 ACCA F9 IWB prelims 2017.docx

Business valuations and market efficiency

Question 3

Relevant costs

Various items in relation to a project are:

Market research costs of $50,000 that have been carried out.

The purchase of an asset that would cost $95,000.

The sale of that asset at the end of the project for $10,000

Depreciation of the asset over the life of the project of $85,000.

Sales revenue per annum of $65,000

Variable costs of $34 per unit produced.

Factory fixed costs of $18,000 per year that will rise to $21,000 per year for the
life of the project.

Apportioned head office costs of $2 per unit representing the project’s share of
existing head office costs.

Which of these items are relevant cash flows?

 Market research is sunk, i.e. it is not a future cash flow so is not relevant.

 The asset purchase is a future cash flow incremental to the project so is
relevant.

 The sale of the asset is also a future cash flow incremental to the project
so is relevant.

 Depreciation isn’t a cash flow and so is not relevant.

 Sales revenue is a future, incremental cash flow and is relevant.

 Variable costs are future incremental cash flows and so are relevant.

 Of the factory fixed costs, only the extra $3,000 per year is incremental to
the project and so only that part is relevant.

 The head office costs are not changing in total, so there is no incremental
element and so they are not relevant.

415