Which of the following statements is CORRECT?
A) An example of a sunk cost is the cost associated with restoring the site of a strip mine once the ore has been depleted.
B) Sunk costs must be considered if the IRR method is used but not if the firm relies on the NPV method.
C) A good example of a sunk cost is a situation where a bank opens a new office,and that new office leads to a decline in deposits of the bank's other offices.
D) A good example of a sunk cost is money that a banking corporation spent last year to investigate the site for a new office,then expensed that cost for tax purposes,and now is deciding whether to go forward with the project.
E) If sunk costs are considered and reflected in a project's cash flows,then the project's calculated NPV will be higher than it otherwise would have been had the sunk costs been ignored.

Question

Quizplus · Accepted Answer

Sunk costs are past costs that have already been incurred and cannot be recovered. The money spent on investigating a site for a new office, which was expensed for tax purposes and cannot be recovered, is a classic example of a sunk cost. This cost should not influence the decision to proceed with the project since it cannot be changed by any future actions.

Which of the Following Statements Is CORRECT