Paul earns $60,000 as an engineer,and he is considering quitting his job and going to graduate school.This $60,000 should be treated as a ____ if Paul runs an NPV analysis of his graduate degree.

Question

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The $60,000 salary that Paul currently earns should be treated as an opportunity cost because it is the value of his best alternative option (i.e. continuing to work as an engineer) that he is giving up to pursue his graduate degree. It is not a sunk cost because it is not a cost that has already been incurred and cannot be recovered. It is also not a fixed cost or cannibalization cost.

Paul Earns $60,000 as an Engineer,and He Is Considering Quitting