Topaz Company is considering replacing an old machine that originally cost $95,000.A new machine will cost $900,000, and the old machine can be sold for $25,000.What is the sunk cost in this situation?
A) $25,000
B) $95,000
C) $995,000
D) $120,000

Question

Quizplus · Accepted Answer

A sunk cost is a cost that has already been incurred and cannot be recovered. In this situation, the cost of the old machine, which was originally purchased for $95,000, is a sunk cost because it has already been incurred and cannot be recovered regardless of whether or not the company decides to replace the machine. The sale price of $25,000 for the old machine is not a sunk cost because it represents a potential future cash inflow if the company decides to sell the machine. Therefore, the best choice is to replace the old machine with the new one because the cost of the new machine is not affected by the sunk cost of the old machine.

Topaz Company Is Considering Replacing an Old Machine That Originally