A oil company is considering an off-shore drilling project in Bass Straight, for which they require an environmental impact study which must be approved by the Federal Government before drilling can commence. The consulting firm that the oil company usually uses has gone out of business, so the company approached a new consulting firm for a quote. This type of study would normally cost $10,000, but in order to attract the potential new client, the consulting firm quoted half the normal price, and therefore gave the oil company an opportunity to get the study done for a cost of just $5,000. The consulting firm completed the study, the Federal Government gave approval for the project, and the oil company is now deciding whether or not this is a positive-NPV project. How would you treat the cost of the environmental impact study for the purposes of the NPV analysis for the drilling operation? a. There is an opportunity cost to the value of $10,000. b. There is a sunk cost to the value of $5,000. c. There is an opportunity cost to the value of $5,000. d. There is a sunk cost to the value of $10,000.
A oil company is considering an off-shore drilling project in Bass Straight, for which they require an environmental impact study which must be approved by the Federal Government before drilling can commence. The consulting firm that the oil company usually uses has gone out of business, so the company approached a new consulting firm for a quote. This type of study would normally cost $10,000, but in order to attract the potential new client, the consulting firm quoted half the normal price, and therefore gave the oil company an opportunity to get the study done for a cost of just $5,000. The consulting firm completed the study, the Federal Government gave approval for the project, and the oil company is now deciding whether or not this is a positive-NPV project. How would you treat the cost of the environmental impact study for the purposes of the NPV analysis for the drilling operation? a. There is an opportunity cost to the value of $10,000. b. There is a sunk cost to the value of $5,000. c. There is an opportunity cost to the value of $5,000. d. There is a sunk cost to the value of $10,000.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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A oil company is considering an off-shore drilling project in Bass Straight, for which they require an environmental impact study which must be approved by the Federal Government before drilling can commence. The consulting firm that the oil company usually uses has gone out of business, so the company approached a new consulting firm for a quote. This type of study would normally cost $10,000, but in order to attract the potential new client, the consulting firm quoted half the normal price, and therefore gave the oil company an opportunity to get the study done for a cost of just $5,000. The consulting firm completed the study, the Federal Government gave approval for the project, and the oil company is now deciding whether or not this is a positive-NPV project.
How would you treat the cost of the environmental impact study for the purposes of the NPV analysis for the drilling operation?
a.
There is an opportunity cost to the value of $10,000.
b.
There is a sunk cost to the value of $5,000.
c.
There is an opportunity cost to the value of $5,000.
d.
There is a sunk cost to the value of $10,000.
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