ECON 2B03 Chapter Notes - Chapter 9: Sunk Costs, Marginal Cost
Document Summary
Past estimation errors: when an assets book value (bv) is greater than its current market value (mv) the difference is called an estimation error, the only except is if there are income tax implications that were not forseen. Sunk costs: sunk costs have no relevance to the replacement decision that must be made except to the extent they affect income taxes, when income tax considerations are involved, we must include the sunk cost in the eea. Existing asset value and outsider viewpoint: perspective that would be taken by an impartial third party to establish the fair mv of a used asset. This viewpoint forces the analyst to focus on the present and future cash flows in a replacement studies. The estimated initial capital investment, annual expenses, and mv are estimates are used to determine the pw of total costs through year k.
