Question 2

The relevant cost for estimating the cash flows of starting a manufacturing business is the $1.2 million for a new factory.

The cost of $1.2 million for a new factory is a relevant cost because it represents a future cash outflow that will directly affect the operations of the new manufacturing business. This expense is necessary for setting up the business and will impact the overall cash flow projections.

A) $30,000 cost of market research

The $30,000 cost of market research, while important for understanding the market, is not directly related to the cash flows of starting the business. It is considered a sunk cost if already incurred and does not influence future cash flows.

B) $100,000 paid for equipment

The $100,000 paid for equipment is also a sunk cost if it has already been paid, making it irrelevant for estimating future cash flows. Only future cash outflows should be considered when assessing the financial viability of starting the new business.

C) $150,000 purchase price of the land

The $150,000 purchase price of the land may seem relevant; however, if the land has already been acquired, it is a sunk cost. Future cash flows should focus on expenses that will be incurred in the new business operations moving forward.

D) $1.2 million for a new factory

The $1.2 million for a new factory is a relevant cost as it represents a necessary investment for the manufacturing business to begin operations. This cost will directly affect the cash flows and is a critical component of estimating the financial requirements for starting the business.

Conclusion

The cost of the new factory is the only relevant cost in this scenario as it reflects an upcoming cash outflow necessary for the business's operation. All other options represent costs that do not influence future cash flows or are already incurred expenses, making them irrelevant for the investment decision at hand.