Question

Fincal Inc. manufactures financial calculators. The company is deciding whether to introduce a new calculator. This calculator will sell for $120. The company feels that sales will be 13,000, 13,000, 14,000, 14,000, 15,000 and 12,500 units per year for the next 6 years. Variable costs will be 30% of sales, and fixed costs are $200,000 per year. The firm hired a marketing team to analyze the viability of the product and the marketing analysis cost $2,000,000. The company plans to use a vacant warehouse to manufacture and store the calculators. Based on a recent appraisal the warehouse and the property is worth $3 million on an after-tax basis. If the company does not sell the property today then it will sell the property 6 years from today at the currently appraised value. This project will require an injection of net working capital at the onset of the project in the amount of $500,000. This networking capital will be fully recovered at the end of the project. The firm will need to purchase some equipment in the amount of $2,400,000 to produce the new calculators. The machine has a 6-year life and will be depreciated using the straight-line method. At the end of the project, the anticipated market value of the machine is $100,000. The firm requires an 8% return on its investment and has a tax rate of 21%. A. Calculate the opportunity cost of the project. (Enter a positive value and round to the nearest dollar). B. Calculate the sunk cost of the project.

Answer 1

Answer :(A.) Calculation of Opprotunity Cost :

Opportunity Cost is the cost of next best alternative use or cost of asset sacrificed to use in another alternative.In case Company plans to use a vacant warehouse and property it could not sell it today , therefore Opportunity cost is $3,000,000 or 3 million

B.) Calculation of sunk Cost

Sunk Cost are the cost which have already been incurred in the past.The firm hired a marketing team to analyze the viability of the product and the marketing analysis cost $2,000,000 is sunk cost as it has been already incurred.