Question No 1:
If two projects are _______________, the fact that they have unequal lives will not affect the analysis.
a)Mutually exclusive
b)Dependent
c)Independent
d)Correlated
Question No 2:
Mr. A, as a financial consultant, has prepared a feasibility report of a project for XYZ Company that the company is planning to undertake. He has suggested that the project is feasible. The consultancy fee paid to Mr. A will be considered as:
a)Sunk cost
b)Opportunity cost
c)Both sunk cost and opportunity cost
d)Neither sunk cost nor opportunity cost
1. b
As a general rules, the unequal life issue never arises for independent projects, but it can be an issue when we compare mutually excluxive projects with significant different lives.
2. a
cost that has already been incurred and cannot be recouped and therefore should not be considered in
an investment decision
•e.g. a consultant’s fee for evaluating the option of launching a new product
Question No 1:
To determine the correct answer to this question, we need to understand the concepts of project analysis and the impact of unequal lives on the analysis.
When two projects are mutually exclusive, it means that selecting one project precludes the selection of the other project. In this case, the fact that they have unequal lives will not affect the analysis because only one project will be chosen, regardless of their different durations.
Therefore, the correct answer to this question is:
a) Mutually exclusive
Question No 2:
To determine the correct answer to this question, we need to understand the concepts of sunk cost and opportunity cost in the context of a feasibility report.
A sunk cost refers to a cost that has already been incurred and cannot be recovered. In this case, the consultancy fee paid to Mr. A is a cost incurred in the past and does not have any relevance in the decision-making process for the feasibility of the project. Therefore, it is considered a sunk cost.
An opportunity cost, on the other hand, refers to the cost of the next best alternative foregone when making a decision. In this case, the consultancy fee paid to Mr. A does not represent the cost of the next best alternative foregone, as it is specifically for his services in preparing the feasibility report for the project.
Therefore, the correct answer to this question is:
a) Sunk cost