Reference no: EM132129691
You have been made treasurer for a day at? AIMCO, Inc. AIMCO 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 feels 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.
Which of the following statements correctly describes your? decision? ? (Select the best answer? below.)
A. You should authorize the? $100,000 expenditure to continue the project because the marginal ?cost-benefit analysis treats the? $2.5 million as part of the? project's initial capital outlay that can be recovered only if the project is implemented.
B. You should not authorize the? $100,000 expenditure to continue the project even if the project will generate a positive net present value. The marginal ?cost-benefit analysis treats the? $2.5 million as a cost that is extremely unlikely to be recovered and the? $100,000 expenditure will also become a cost unlikely to be recovered.
C. You should authorize the? $100,000 expenditure to continue the project if the project will generate a positive net present value. The marginal ?cost-benefit analysis treats the? $2.5 million as a cost that is irrelevant to the current decision making.
D. You should not authorize the? $100,000 expenditure to continue the project because it is surpassed by new telephony technology. Though the marginal ?cost-benefit analysis treats the? $2.5 million as a cost that is irrelevant to the current decision? making, continuing the project would be foolish even if the? $100,000 expenditure generates a positive net present value.