Question

Which of the following should not be included in the analysis of a proposed investment?A. The current market value of an existing building to be used in the project.B. The amount paid 4 years ago for an existing building to be used in the project.C. The expected after-tax salvage value at the end of a project of an existing building to be used in the project.D. The net working capital balance remaining at the end of the project.

Answer 1

Answer:

B. The amount paid 4 years ago for an existing building to be used in the project

Explanation:

As this value is sunk it should be ignored. The company should think on project for the building considering his market value.

Also, the amount of working capital (used in the project in form of accounts receivable, account payable, prepaid and others) is important as this release increase the cash flow of the project.

The salvage value is also important as will provide cash flow as well.

As general rule, always look into the future to evaluate the projects never at historic cost.