Question

Management is considering two alternatives. Alternative A has projected revenue per year of $100,000 and costs of $70,000 while Alternative B has revenue of $100,000 and costs of $60,000. Both projects require an initial investment of $250,000 of which $75,000 has already been set aside and will be used as a down payment on the project that is chosen. There are also other qualitative factors that management must consider before making a final choice. Which of the following statements is correct about relevant costs and relevant revenues.
A. The only relevant item are the costs as they differ between alternatives
B. The projected revenues are relevant to the decision
C. The sunk cost of $75,000 is relevant
D. The initial investment of $250,000, the projected revenues, and the projected costs are all relevant

Answer 1

The correct statement about relevant costs and relevant revenues is the initial investment of $250,000, the projected revenues, and the projected costs are all relevant.

In order to determine the profitability of a project, the initial cost of the investment, the projected revenues and projected costs are relevant. These costs and revenue are necessary in calculating the investment's profitability using the capital budgeting methods.

Capital budgeting methods are used in determining the profitability of an investment. Sunk cost are costs that have already been incurred and they cannot be recovered.

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