CAF-7 · Chapter 13 · Question 1 of 15
A company commissioned a market research study last year for Rs. 5 million to determine if a new product would be successful. The company is now calculating the Net Present Value (NPV) to decide whether to build the factory. How should the Rs. 5 million research cost be treated in the NPV calculation?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) Excluded entirely, as it is a sunk cost
Explanation
Relevant costing principles dictate that only future, incremental cash flows are included in an investment appraisal. The research study was paid for in the past regardless of the decision made today, making it a sunk cost that must be ignored.
More Introduction to Project Appraisal MCQs
- Q3Which of the following is a major theoretical weakness of the Payback Period method for investment appraisal?
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- Q6How is an investment in 'Working Capital' treated at the end of a project's life in a standard Net Present Value (NPV) calculation?
- Q7A company is comparing two different machines that produce the exact same output but have different useful lives. Machine A lasts 3 years…