Chapter 1, Problem 1.4WUE

You have been made treasurer for a day at AIMCO, which develops technology for video conferencing. A manager of the satellite division has asked you to authorize a capital expenditure in the amount of $100,000. The manager states that this expenditure is necessary to continue a long-running project designed to use satellites to allow video conferencing anywhere on the planet. The manager admits that the satellite concept has been surpassed by recent technological advances in telephony, but he believes that AIMCO should continue the project because $2.5 million has already been spent over the past 15 years on this project. Although you believe the project will generate future cash outflows that exceed its inflows, the manager believes it would be a shame to waste the money and time already spent.

Use marginal cost- benefit analysis to make your decision regarding whether you should authorize the $100,000 expenditure to continue the project.