Wilbert's, Inc.paid €90,000, in cash, for a piece of equipment three years ago.Last year, the company spent €10,000 to update the equipment with the latest technology.The company no
Longer uses this equipment in its current operations and has received an offer of €50,000 from a
ﬁrm who would like to purchase it.Wilbert's is debating whether to sell the equipment or to expand
Its operations such that the equipment can be used.When evaluating the expansion option, what
Value, if any, should Wilbert's assign to this equipment as an initial cost of the project?

Question

Quizplus · Accepted Answer

When evaluating the expansion option, Wilbert's should assign the current fair market value of the equipment as the initial cost of the project, which is €50,000. The initial cost is the amount of cash outflow that will occur due to a project. Since Wilbert's would have to spend €50,000 to purchase the equipment if it didn't already have it, that value represents the cost of acquiring it for the purposes of the expansion project. Any historical costs (such as the original €90,000 purchase) or upgrades (such as the €10,000 technology update) should not be considered in this analysis.