While Developing a New Product Line, Cook Company Spent $3

question 2

Multiple Choice

While developing a new product line, Cook Company spent $3 million two years ago to build a plant for a new product.It then decided not to go forward with the project, so the building is available for sale or for a new product.Cook owns the building free and clear⎯there is no mortgage on it.Which of the following statements is CORRECT?

• A) If the building could be sold, then the after-tax proceeds that would be generated by any such sale should be charged as a cost to any new project that would use it.
• B) This is an example of an externality, because the very existence of the building affects the cash flows for any new project that Rowell might consider.
• C) Since the building was built in the past, its cost is a sunk cost and thus need not be considered when new projects are being evaluated, even if it would be used by those new projects.
• D) If there is a mortgage loan on the building, then the interest on that loan would have to be charged to any new project that used the building.
• E) Since the building has been paid for, it can be used by another project with no additional cost.Therefore, it should not be reflected in the cash flows for any new project.

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Definitions:

Self-Evaluation

The process of examining and reflecting on one's own abilities, characteristics, beliefs, and actions to assess their significance and worth.

Middle-Range Theory

A framework in sociology aiming to integrate theory and empirical research, focusing on limited aspects of social phenomena rather than broad, abstract theories.

Theoretical Perspective

A set of assumptions about reality that inform the questions we ask and the kinds of answers we arrive at as researchers or observers.

Schema

A specific cognitive structure that organizes the processing of complex information about other persons, groups, and situations. Our schemas guide what we perceive in the environment, how we organize information in memory, and what inferences and judgments we make about people and things.