Adams Audio is considering whether to make an investment in a new type of technology. Which of the following factors should the company consider when it decides whether to undertake the investment?
A) The company has already spent $3 million researching the technology.
B) The new technology will affect the cash flows produced by its other operations.
C) If the investment is not made, then the company will be able to sell one of its laboratories for $2 million.
D) All of the factors above should be considered.
E) Factors b and c should be considered.

Question

Quizplus · Accepted Answer

Only factors b and c are relevant to a decision regarding the investment in the new technology. The fact that the company has already spent $3 million on researching the technology is a sunk cost and should not influence the decision. However, the fact that the investment will affect the cash flows produced by its other operations and that not making the investment would allow the company to sell one of its laboratories for $2 million are both relevant considerations.

Adams Audio Is Considering Whether to Make an Investment in a New