The questions are follow:

1. A few of you older folks may remember “The New Coke”. In 1985, Coca-Cola tried to introduce this drink as a replacement for its traditional Coke. They poured millions into promoting New Coke, but consumers never became enthusiastic, and after less than a year, the company gave up and abandoned the whole thing, at a huge loss.
When companies make investment mistakes, what do you think that the source of the mistake is likely to be? Is it that the company underestimates the costs, or overestimates the benefits, or uses the wrong discount rate, or fails to understand the risk, or what?

2. Describe and give an example of each: a sunk cost, an allocated cost, an opportunity cost. When should these costs be included and when should they be ignored in developing project cash flows?

3. If you’re considering an investment in a new fixed asset, why might you need to consider also investing in net working capital? And what’s the logic of assuming that the NWC investment is recovered at the end of the project’s life?

4. When calculating the AT salvage value of an asset, we need to determine whether there’s a gain or a loss on the sale, and what the tax liability will be. How is all that determined?