Rowell Company spent $3 million two years ago to build a plant for a new project. It then decided not to go forward with the project, so the building is available for sale or for other new projects. Rowell owns the building free and clear--there is no mortgage on it. Which of the following statements is CORRECT? a. 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. b. 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. c. Since the building was built in the past, its cost is a sunk cost and thus need not be considered when new projects are being evaluated, even if it would be used by those new projects. d. If the building could be sold, then the after-tax proceeds that would be generated by any such sale should be charged as an opportunity cost to any new project that would use it.
Rowell Company spent $3 million two years ago to build a plant for a new project. It then decided not to go forward with the project, so the building is available for sale or for other new projects. Rowell owns the building free and clear--there is no mortgage on it. Which of the following statements is CORRECT? a. 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. b. 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. c. Since the building was built in the past, its cost is a sunk cost and thus need not be considered when new projects are being evaluated, even if it would be used by those new projects. d. If the building could be sold, then the after-tax proceeds that would be generated by any such sale should be charged as an opportunity cost to any new project that would use it.
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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Transcribed Image Text:Rowell Company spent $3 million two years ago to build a plant for a new project. It then decided not to
go forward with the project, so the building is available for sale or for other new projects. Rowell owns
the building free and clear--there is no mortgage on it. Which of the following statements is CORRECT?
a. 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.
b. 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.
c. Since the building was built in the past, its cost is a sunk cost and thus need not be considered when
new projects are being evaluated, even if it would be used by those new projects.
d. If the building could be sold, then the after-tax proceeds that would be generated by any such sale
should be charged as an opportunity cost to any new project that would use it.
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