Part 4 of 4:

The canvas roofs on the carriages need to be replaced with metal roofs. The Park Board already owns metal roofs that could be used on the carriages. The roofs have a current market value of $10,000

What happens to NPV under this assumption?

Question

Part 4 of 4:

The canvas roofs on the carriages need to be replaced with metal roofs. The Park Board already owns metal roofs that could be used on the carriages. The roofs have a current market value of $10,000

What happens to NPV under this assumption?

BlackTom AI · Accepted Answer

Question restatement: The project involves replacing canvas roofs with metal roofs, and the Park Board already owns metal roofs that could be used. The roofs have a current market value of $10,000. What happens to NPV under this assumption?

Option A: Decreases by $10,000. This is the correct reasoning when considering opportunity costs. Since you would be using roofs the Board already owns, you forgo the opportunity to sell them for $10,000. In NPV analysis, using an asset you own (rather than selling it) carries an opportunity cost equal to the foregone salvage value. That opportunity cost reduces the project’s incremental cash flows by $10,000, thereby decreasing the NPV by $10,000.

Option B: No change. This would be true if the owned asset were a sunk cost with no opportunity cost attached. However, in capital budgeting, using an asset you own typically means you forego the $10,000 sale value, so there is an opportunity cost that should affect NPV. Therefore, this option is incorrect.

Option C: Increases by $10,000. This would imply you gain $10,000 in incremental cash flow by using the owned roof, but the correct interpretation is that you avoid a cash outlay of purchasing new roofs while also forgoing the $10,000 sale value of the roofs you already own. The net effect on NPV is not an increment of +$10,000; it’s a reduction due to the foregone sale, so this option is incorrect.

Supporting detail: In capital budgeting, sunk costs are ignored, but opportunity costs are included. The market value of the existing roofs represents the amount you could receive if you sold them today. By choosing to use them instead of selling, you incur an implicit cost equal to that foregone sale, which reduces NPV by $10,000. The analysis therefore shows a negative impact of $10,000 on NPV due to this opportunity cost.

COMM_V 298 201-207 2024W2 Class 18: Unlevered Free Cash Flow Practice Quiz

Part 4 of 4: The canvas roofs on the carriages need to be replaced with metal roofs. The Park Board already owns metal roofs that could be used on the carriages. The roofs have a current market value of $10,000 What happens to NPV under this assumption?

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