When Using the Net Present Value Method to Compare Keeping

question 51

Multiple Choice

When using the net present value method to compare keeping an old building or disposing of it and acquiring a new building, the current cash residual value of the old building should be

• A) a subtraction from the price paid for the new building.
• B) viewed as a cash flow.
• C) an addition to the price paid for the new building.
• D) irrelevant to the decision.

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Definitions:

Accounting Costs

The recorded expenses in the financial statements of a company, including both fixed and variable costs incurred during business operations.

Sunk Costs

Costs that have already been incurred and cannot be recovered.

Foregone Opportunities

Benefits or earnings that are missed out on when choosing one alternative over another.

Accounting Costs

The actual expenses and cash outlays that a business incurs, which are recorded in its financial statements.