Page 233 - P1 Integrated Workbook STUDENT 2018

Answers

Depreciation charge

This is not a cash flow. Non-cash items are not relevant for decision making.
The relevant cost is $0.

Machine

The historic cost of $30,000 is an example of a sunk cost. Sunk costs are not
relevant for decision making.

The fact that the machine is being used elsewhere is an example of an
opportunity cost. Using the machine in the project removes the opportunity of
using the machine elsewhere.

Using the machine elsewhere would generate $20,000 (the scrap value of
$12,000 is not relevant as the machine has a higher value from being used
than being scrapped). This is the opportunity cost.

However, the machine is not scarce. A replacement machine can be bought
for $15,000. This is lower than the opportunity cost and therefore it is
worthwhile buying a replacement machine. The relevant cost of using the
machine in the project is $15,000.

Central overheads

There is no indication that these costs will change because of the conversion
project. These costs have no incremental element and non-incremental costs
are not relevant for decision making. The relevant cost is $0.

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