Name: Minting Zhu
1.Why does Greystock include the engineering costs of £500,000 in his analysis?
In this case, the engineering costs are sunk costs that have been paid and cannot be recovered. According to the principle that sunk costs should not be included in incremental earnings, it is not reasonable for Greystock to include the engineering costs of £500,000 in his analysis.
2. Is Greystock right in not including a charge for the increased use of rolling stock in his analysis? Why?
Greystock should include the charge for increased use of rolling stock in his analysis. Essentially, the Transport Division and Immediate Chemical Group belong to the same company. In order to support the project of Merseyside, the Transport Division has to purchase new rolling stock two years earlier. Hence the charge for rolling stock should be considered as a part of opportunity cost that has indirect impact on the company’s earnings. Based on the principle that all effects should be included in incremental earnings forecast, the £2 million investment should be added into the analysis.
3. Is Greystock right in stating, “a cannibalisation charge is rubbish”? Why?
Cannibalisation refers to a reduction in sales of existing products as a result of a new project carried out by the same producer. Thus cannibalisation charge should be seen as a substantial portion of externalities, which affect earnings indirectly. Since all direct and indirect effects on earnings have to be included…