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the company has multiple operating divisions, each having unique
risk attributes and capital costs?
16. Which one of the following costs, if any, is relevant in making
financial decisions?
17. Buff Co. is considering replacing an old machine with a new
machine. Which of the following items is economically relevant to
Buff's decision? (Ignore income tax considerations.)
18. The ABC Company is trying to decide between keeping an
existing machine and replacing it with a new machine. The old
machine was purchased just two years ago for $50,000 and had an
expected life of 10 years. It now costs $1,000 a month for
maintenance and repairs, due to a mechanical problem. A new
replacement machine is being considered, with a cost of $60,000.
The new machine is more efficient and it will only cost $200 a
month for maintenance and repairs. The new machine has an
expected life of 10 years. In deciding to replace the old machine,
which of the following factors, ignoring income taxes, should ABC
not consider?
19. Egan Co. owns land that could be developed in the future. Egan
estimates it can sell the land for $1,200,000, net of all selling costs.
If it is not sold, Egan will continue with its plans to develop the
land. As Egan evaluates it options for development or sale of the
property, what type of cost would the potential selling price
represent in Egan's decision?
20. Which of the following statements is true regarding opportunity
cost?
21. For the year ended December 31, 2004, Abel Co. incurred direct
costs of $500,000 based on a particular course of action during the
year. If a different course of action had been taken, direct costs
would have been $400,000. In addition, Abel's 2004 fixed costs were
$90,000. The incremental cost was