Shamroll inc. is a household products frim that is considering developing a new detergent. In evaluationg whether to go ahead with the new detergent project, which of the following statements is most correct?

A) The company will produce the detergent in a building that they already own. The cost of the building is therefore zero and should be exluded from the analysis

B) THe company will need to use some equipment that it could have leased to another company. This equipment lease could have generated $200,000 per year in afte-tax income. THe $2,000 should be excluded because the equipment can no longer be leased

C) The company will need to hire 10 new workers whose salaries and benefits will total $400,000 per year. Labor costs are nt part of capital budgeting and should be excluded.

D) The company will produce the detergent in a building that is renovated 2 years ago for $300,000. The $300,000 should be excluded from the analysis.

The best answer is D

A - sometimes, in questions like these, the examiner discusses the building/land cost. But they say they could sell it / lease it at X amount today. That sale would be an "opporunity cost" - and it would be counted.

B - Just the oppoisite of what I said about A. If the equipment could have generated $200k, than that is an opportunity cost and it is relevant.

C - These costs would form part of the fixed costs. That is necessary when calculating the sale price, and also eventually tax to be paid.

D - The building was renovated 2 years ago. Therefore it is NOT a cost that was caused by deciding to go ahead with the project. It is a sunk cost, and therefore not relevant to this project.

In other words Statements A-C are all false. D is true.

The correct statement in this case would be:

B) The company will need to use some equipment that it could have leased to another company. This equipment lease could have generated $200,000 per year in after-tax income. The $200,000 should be excluded because the equipment can no longer be leased.

Explanation:
When evaluating the feasibility of a new project, it's important to consider all relevant costs and benefits. However, it's also crucial to differentiate between relevant and irrelevant costs. Relevant costs are those that will change as a result of the project, while irrelevant costs are those that will not be affected.

In option A, the cost of the building is already owned by the company, so it would be classified as a sunk cost, meaning it has no impact on the decision-making process and should be excluded.

In option C, the salaries and benefits of the new workers are considered labor costs, which are relevant costs and should be included in the analysis. Labor costs play a significant role in determining the overall feasibility and profitability of the project.

In option D, the renovation cost of $300,000 for the building is a relevant cost. Renovation costs directly impact the investment required for the new detergent project and should be included in the analysis.

Option B is the correct statement because the potential income of $200,000 per year from leasing the equipment is a relevant cost that the company would have earned if it hadn't been used for the detergent project. Since the equipment will no longer be leased, this opportunity cost should be excluded from the analysis as it no longer factors into the decision-making process.