Question

While developing a new product line, Cook Company spent $3 million two years ago to build a plant for a new product. It then decided not to go forward with the project, so the building is available for sale or for a new product. Cook owns the building free and clear⎯there is no mortgage on it. Which of the following statements is CORRECT?(A) Since the building has been paid for, it can be used by another project with no additional cost. Therefore, it should not be reflected in the cash flows for any new project.(B) If the building could be sold, then the before-tax proceeds that would be generated by any such sale should be charged as a cost to any new project that would use it.(C) This is an example of an externality, because the very existence of the building affects the cash flows for any new project that Rowell might consider.(D) If there is a mortgage loan on the building, then the interest on that loan would have to be charged to any new project that used the building.None of the above.

Answer 1

Answer:

C

Explanation:

This is an example of an externality, because the very existence of the building affects the cash flow for any new project that Rowell might consider.