Question
Bellington, Inc. is considering the purchase of new, sophisticated machinery for a special threeyear project. The machinery requires a special lubricating oil that probably will
Bellington, Inc. is considering the purchase of new, sophisticated machinery for a special threeyear project. The machinery requires a special lubricating oil that probably will never be used, but must be available at all times should the machine break down. Bellington purchases $2,000 of lubricating oil to keep on hand just in case it is needed. At the end of the threeyear project, it is expected the lubricating oil can be sold back to the distributor for $2,000. Which of the following statements is MOST correct?
A. The $2,000 represents an additional investment in working capital that should be included in the capital budgeting analysis.
B. The $2,000 for the lubricating oil should be excluded from the analysis because it is recovered at the end of three years, so the final cost is zero.
C. The lubricating oil is a sunk cost that should be excluded from the analysis.
D. The $2,000 for lubricating oil is simply an accounting entry and does not represent a real cash flow.
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