Question

Newcastle Coal Co. owns a warehouse that it is not currently using. It could sell the warehouse for $300,000 or use the warehouse in a new project. Should Newcastle Coal Co. include the value of the warehouse as part of the initial investment in the new project?
(A) Yes, because the firm could sell the warehouse if it didn’t use it for the new project.
(B) No, because the cost of the warehouse is a sunk cost.
(C) No, because the company will still be able to sell the warehouse once the project is complete.

Answer 1

Answer:

A) Yes, because the firm could sell the warehouse if it didn’t use it for the new project.

Explanation:

• The option A is correct in our scenario, because the firm still have the option to sale the warehouse even they want to use it for the new project.
• The option B is not correct as the cost of warehouse is not sunk cost, such a cost that has been utilized and  can't be recovered, but we can sale the warehouse and get the payment.
• The option C is incorrect as once the project is complete then it would be a part of that project so they will not sale the warehouse.