The Proto Corporation is evaluating a new product. The cost of the equipment to produce the new product is $10 million, and the cost to set up the equipment is $0.1 million. Proto spent $4 million on research and development for this new product. In addition, Proto will need to use a building that originally cost $200 million, but which is on the books at $6 million; Proto 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 ($10 million) and the cost to set up the equipment ($0.1 million). The research and development costs are sunk costs and should not be included in the initial cash outlay. The book value or original cost of the building is also not relevant since it has no alternative use and does not represent an additional cash outlay for this project. Therefore, the initial cash outlay is $10 million + $0.1 million = $10.1 million.

The Proto Corporation Is Evaluating a New Product