Sunk costs and opportunity costsMasters GolfProducts, Inc., spent 4

4 years and $ 1 comma 060 comma 000

$1,060,000 to develop its new line of club heads to replace a line that is becoming obsolete. To begin manufacturingthem, the company will have to invest $ 1 comma 760 comma 000

$1,760,000 in new equipment. The new clubs are expected to generate an increase in operating cash inflows of $ 744 comma 000

$744,000 per year for the next 10

10 years. The company has determined that the existing line could be sold to a competitor for $ 242 comma 000

$242,000.

a. How should the $ 1 comma 060 comma 000

$1,060,000 in development costs beclassified?

b. How should the $ 242 comma 000

$242,000 sale price for the existing line beclassified?

c. What are all the relevant cash flows for years 0 thru 10

10? (Note: Assume that all of these numbers are net oftaxes.)

a. How should the $ 1 comma 060 comma 000

$1,060,000 in development costs beclassified?(Select the best answerbelow.)

A.

The $ 1 comma 060 comma 000

$1,060,000 development costs should not be considered part of the decision to go ahead with the new production. This money has already been spent and cannot be retrieved so it is an opportunity cost.

B.

The $ 1 comma 060 comma 000

$1,060,000 development costs should be considered part of the decision to go ahead with the new production. This money has already been spent as part of the opportunity cost of the project.

C.

The $ 1 comma 060 comma 000

$1,060,000 development costs should be considered part of the decision to go ahead with the new production. This money has already been spent as part of the investment project.

D.

The $ 1 comma 060 comma 000

$1,060,000 development costs should not be considered part of the decision to go ahead with the new production. This money has already been spent and cannot be retrieved so it is a sunk cost.

b. How should the $ 242 comma 000

$242,000 sale price for the existing line beclassified?(Select the best answerbelow.)

A.

The $ 242 comma 000

$242,000 sale price of the existing line is a sunk cost. If Masters Golf Products proceeds with the new line of clubs the existing line worth $ 242 comma 000

$242,000 will be wasted.

B.

The $ 242 comma 000

$242,000 sale price of the existing line is an opportunity cost. If Masters Golf Products does not proceed with the new line of clubs it will lose the opportunity to recover the $ 242 comma 000

$242,000 in inventory.

C.

The $ 242 comma 000

$242,000 sale price of the existing line is a sunk cost. If Masters Golf Products does not proceed with the new line of clubs they will not receive the $ 242 comma 000

$242,000.

D.

The $ 242 comma 000

$242,000 sale price of the existing line is an opportunity cost. If Masters Golf Products does not proceed with the new line of clubs they will not receive the $ 242 comma 000

$242,000.

c. The cash flow for year 0 is $

nothing

. (Round to the nearestdollar.)

The cash flow for years 1 thru 10

10 is $

nothing

. (Round to the nearestdollar.)

Click to select your answer(s).