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Chapter 15
Example 2
A new project requires the use of an existing machine that would otherwise be
sold. Information concerning the machine is as follows:
Original purchase price = $20,000
Current net book value(NBV) = $5,000
Estimated current sales value = $4,000
What is the relevant cost (if any) of using the machine in the project?
The original purchase price is sunk so not relevant.
The NBV is a combination of the purchase price (sunk) and depreciation (not a
cash flow) so is not relevant.
By undertaking the project we miss out on the opportunity of selling the asset
and thus have an opportunity cost of ($4,000).
Cash position if accept proposal NIL
Cash position if reject proposal (and do best alternative instead): receive
$4,000.
So relevant cash flow = $4,000.
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