The Über Corporation is evaluating a new product. The cost of the equipment to produce the new product is $100 million, and the cost to set up the equipment is $1 million. Über spent $5 million on research and development for this new product. In addition, Über will need to use a building that originally cost $200 million, but which is on the books at $20 million; Über has no other use for this building and it would be unused if it does not use this building. The initial cash outlay associated with this project is closest to:

Question

Quizplus · Accepted Answer

The initial cash outlay for the project includes the cost of the equipment ($100 million) and the cost to set up the equipment ($1 million), totaling $101 million. The $5 million spent on research and development is a sunk cost and should not be included in the initial cash outlay. The cost or book value of the building is also not included since it is a sunk cost and the building has no alternative use.

The ÜBer Corporation Is Evaluating a New Product