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Chapter 6

Relevant costs associated with non

current assets

The relevant costs associated with non-current assets as follows:

Typical relevant cash flows

 The purchase price of any new machinery that needs to be bought.

 If an existing machine is to be used in the project that would otherwise have
been sold, then there is an opportunity cost equal to the proceeds foregone.

 Scrap/disposal proceeds on new assets bought.

 If we need to take an existing machine from another department and it is not
replaced (either by choice or because a replacement is not available), then
there is an opportunity cost equal to the lost contribution from the other
department would need to be included Items that are not relevant.

Items that are not relevant

 Depreciation is not a cash flow so is never relevant.

 Profit or loss on disposal incorporates accumulated depreciation so is not
relevant – instead look at the cash element only – i.e. the scrap proceeds.

 The original purchase price of existing machinery is a sunk cost.

 The NBV of existing machinery is a combination of the original price (sunk)
and accumulated depreciation (not a cash flow).

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