Question

ASAP please

1.  In capital budgeting, should the following be ignored, or rather added or subtracted from the new machine’s purchase price when estimating initial cash outflow? When estimating the machine’s depreciable basis?

a. The market value of the old machine is $500, the old machine has a remaining useful life, and the investment is a replacement decision.

b. An additional investment in inventory of $2,000 is required.

c. $200 is required to ship the new machine to the plant site.

d. A concrete foundation for the new machine will cost $250.

e. Training of the machine operator will cost $300.

2. What is the purpose of requiring more levels of management approval, the larger the proposed capital expenditure? Is more information also required in support of the request?

Answer 1

As per rules I am answering the first 4 subparts of the question

1a: the market value of the old machinery is the opportunity cost and needs to be considered in the initial cash flow. However it will not be added to the cost of new machinery because it does not increase the worth or the efficiency of the new machine.

2: 1b: The additional investment in inventory will be added to the initial cash flow because it is additional investment in working capital and is a cash outflow for the business due to the investment under consideration. However it will not be added to the cost of new machinery because it does not increase the worth or the efficiency of the new machine.

3: 1c: the amount expended for shipping the new machinery is an additional cash outflow and should be added to the initial cost since it has occurred due to the decision of taking on this project. It will also be added to the cost of the new machinery because it is required for the functioning of the same.

4: 1d: the amount expended for foundation of the new machinery is an additional cash outflow and should be added to the initial cost since it has occurred due to the decision of taking on this project. It will also be added to the cost of the new machinery because it is required for the functioning of the same.