This same information is used for the next 5 questions, but is repeated in each question. Your company is considering the addition of a new product line. The project would require the purchase of a new piece of machinery at a price of $100,000. Year 1 depreciation will be $37,455 and the fully depreciated machine will be sold at the end of the project for $20,000. Additional charges of $10,000 for delivery, $2,500 for installing and $1,000 for testing of the machine will also be incurred before the project can begin. Purchasing the machine will cause inventories to increase by $10,000. The machine will produce incremental gross sales of $150,000 each year, but also incur additional operating costs of $20,000 each year. The new project would lower pre-tax sales of the firms other products by $15,000 each year, but it would also cause an annual $7,000 reduction in costs for the other products, due to decreases in volume. If the firm proceeds with this project it will be giving up $5,000 annual rent that it now receives from renting out the space where the machine will be used. The firms marginal tax rate is 40%. Assume no inflation.

Your company is considering the addition of a new product line. The project would require the purchase of a new piece of machinery at a price of $100,000. Year 1 depreciation will be $37,455 and the fully depreciated machine will be sold at the end of the project for $20,000. Additional charges of $10,000 for delivery, $2,500 for installing and $1,000 for testing of the machine will also be incurred before the project can begin. Purchasing the machine will cause inventories to increase by $10,000. The machine will produce incremental gross sales of $150,000 each year, but also incur additional operating costs of $20,000 each year. The new project would lower pre-tax sales of the firms other products by $15,000 each year, but it would also cause an annual $7,000 reduction in costs for the other products, due to decreases in volume. If the firm proceeds with this project it will be giving up $5,000 annual rent that it now receives from renting out the space where the machine will be used. The firms marginal tax rate is 40%. Assume no inflation. The $5,000 annual rent that the company now receives from renting the space, but will lose if they proceed with the project is called:

Sunk Cost

Cannibalization

Opportunity Cost

Working Capital

Depreciation