Question

3

Hull Engineering is considering purchasing a new machine in 2021. During 2020 they have spent $7,000 on research and $5,000 on staff travel costs visiting various manufacturers to choose a machine. The machine will cost $65,000 and they will need to spend a further $10,000 having it delivered to the factory and installed. What is the relevant cost of the machine in making a decision whether or not to buy the machine?

Select one:

a. $75,000

b. $87,000

c. $70,000

d. $82,000

e. $65,000

Answer 1

Answer a) 75000 $
The costs related to the purchase of the asset and associated to putting the asset to use are included in the original cost for considering capital budgeting decisions. Therefore the original cost will be
= Price + installation costs
= 65000 + 10000
=75000 $

Research and travel expenses are revenue expenditures. Travel expenses of the staff can't be included. Only the transportation cost of the asset can be included for considering the decisions.