Which of the following is an example of a sunk cost in a capital budgeting decision regarding the replacement of an existing piece of equipment for a profitable business that pays taxes?
A) The disposal (salvage) value of the equipment to be replaced.
B) The original purchase price of the equipment to be replaced.
C) The additional net working capital requirement.
D) The operating cost of the new equipment.
E) Income taxes on the disposal of the equipment to be replaced.

Question

Quizplus · Accepted Answer

A sunk cost is a cost that has already been incurred and cannot be recovered or changed by any future actions. Therefore, the original purchase price of the equipment to be replaced is a sunk cost as it cannot be recovered or changed by the decision of replacing the equipment. The other choices are not sunk costs as they are either future costs or can be recovered/changed by the decision of replacing the equipment.

Which of the Following Is an Example of a Sunk