Erosion costs.

Fat Tire Bicycle Company currently sells 39,000 bicycles per year. The current bike is a standard balloon-tire bike selling for $110, with a production and shipping cost of $40.

The company is thinking of introducing an off-road bike with a projected selling price of $390

and a production and shipping cost of $300. The projected annual sales for the off-road bike are 14,000. The company will lose sales in fat-tire bikes of 9,000 units per year if it introduces the new bike, however. What is the erosion cost from the new bike? Should Fat Tire start producing the off-road bike?

What is the erosion cost from the new bike?

$(Round to the nearest dollar.)

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Opportunity cost.

Revolution Records will build a new recording studio on a vacant lot next to the operations center. The land was purchased five years ago for $450,000.

Today, the value of the land has appreciated to $760,000. Revolution Records did not consider the value of the land in its NPV calculations for the studio project (it had already spent the money to acquire the land long before this project was considered). The NPV of the recording studio is $590,000. Should Revolution Records have considered the land as part of the cash flow of the recording studio? If yes, what value should be used, $450,000 or $760,000?

How will the value affect the project?

Should Revolution Records have considered the land as part of the cash flow of the recording studio?(Select the best response.)

A.Yes.

B.No.