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A company is evaluating a prospective project. The project would use equipment that the company already...

A company is evaluating a prospective project. The project would use equipment that the company already fully owns. Is the original cost of the equipment part of the initial cost of this prospective project? Why or why not?

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Expert Solution

If the company uses an equipment which is earlier owned by it , then should only value it after taking different type of consideration-

1. If the equipment is having no opportunity cost and it is remaining idle, then it should not be included into the cost of the new project.

2. If the equipment is used in other project and there are opportunity costs associated with using it into this project, then the opportunity costs are to be included in the overall cost of the new project.

3. If there is another use of this equipment and it has been used on this project permanently then it should be recorded on the replacement cost.

So these are the various concept of relevant costing one should be incorporating while deciding upon the value of the equipment to be included in value of the project or not .

So one should choose to include the cost of the equipment into the overall project based upon the abovelisted circumstances.

jeff jeffy answered 2 years ago
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