Which of the following statements best describes a situation involving sunk costs?
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 money that a banking corporation spent last year to investigate the site for a new office, then expensed those funds for tax purposes, and now is deciding whether to go forward with the project.
D)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 be.

Question

Quizplus · Accepted Answer

Sunk costs refer to money that has already been spent and cannot be recovered. In choice C, the money spent by the banking corporation on investigating a site for a new office, which was then expensed for tax purposes, represents a sunk cost because it cannot be recovered regardless of whether the project goes forward.

Which of the Following Statements Best Describes a Situation Involving