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Boulder Company spent $5 million 2 years ago to build a plant for a new product. It then decided not ...

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Boulder Company spent $5 million 2 years ago to build a plant for a new product. It then decided not ...

Boulder Company spent $5 million 2 years ago to build a plant for a new product. It then decided not to go forward with the project, so the building is available for sale or for a new product. Boulder owns the building free and clear—there is no mortgage on it. Which of the following statements is correct?

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Since the building has been paid for, it can be used by another project with no additional cost. Therefore, it should not be reflected in the cash flows for any new project.

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If there is a mortgage loan on this building, then the interest on that loan would have to be charged to any new project that used the building.

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This is an example of a negative externality, because the very existence of the building affects the cash flows for any new project that Boulder might consider.

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If the building could be sold, then the after-tax proceeds that would be generated by any such sale should be charged as a cost to any new project that would use it.

Textbook

Financial Management: Theory and Practice

Edition: 4^th

Authors: Brigham, Ehrhardt, Gessaroli, Nason

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