When considering which values to use in Investment Appraisal,only "Relevant Costs" are used.
A company has identified the following costs involved in a project:
(i)Project Manager salary £30,000.The Project Manager is currently an accountant paid £28,000 - when the project starts,a new accountant will be employed at a cost of £20,000.
(ii)The Project Office will be located in a current office; rent is £3,000.
(iii)The additional income is expected to be £400,000 before tax,which is payable at 30%
The Relevant Costs are:

Question

Quizplus · Accepted Answer

"Relevant Costs" are incremental costs. The current salary cost is £28,000. The new cost is £50,000. The increase in salaries is only the net difference of £22,000.The rent will be paid regardless of the project going ahead or not. Unless there is an alternative use for the office - eg it could be rented out. The "lost rent" is an opportunity cost.The additional income is before tax, there will be £120,000 tax to pay and so the net income is £280,000

When Considering Which Values to Use in Investment Appraisal,only "Relevant