Smith Industries is considering replacing a machine that is presently used in its production process. The following information is available: $\begin{array}{|l|r|r|}
\hline & \text { Old Machine } & \begin{array} { l }
\text { Replacement } \
\text { Machine }
\end{array} \
\hline \text { Original cost } & \$ 55,000 & \$ 45,000 \
\hline \text { Remaining useful life in years } & 3 & 3 \
\hline \text { Current age in years } & 3 & 0 \
\hline \text { Book value } & \$ 33,000 & \
\hline \text { Current disposal value in cash } & \$ 9,000 & \
\hline \text { Future disposal value in cash (in 5 years) } & \$ 0 & \$ 0 \
\hline \text { Annual cash operating costs } & 8,500 & \$ 3,500 \
\hline
\end{array}$ Which of the following amounts represent a sunk cost?

Question

Smith Industries is considering replacing a machine that is presently used in its production process. The following information is available: $\begin{array}{|l|r|r|}
\hline & \text { Old Machine } & \begin{array} { l } 
\text { Replacement } \
\text { Machine }
\end{array} \
\hline \text { Original cost } & \$ 55,000 & \$ 45,000 \
\hline \text { Remaining useful life in years } & 3 & 3 \
\hline \text { Current age in years } & 3 & 0 \
\hline \text { Book value } & \$ 33,000 & \
\hline \text { Current disposal value in cash } & \$ 9,000 & \
\hline \text { Future disposal value in cash (in 5 years) } & \$ 0 & \$ 0 \
\hline \text { Annual cash operating costs } & 8,500 & \$ 3,500 \
\hline
\end{array}$ Which of the following amounts represent a sunk cost?

Quizplus · Accepted Answer

A sunk cost is a cost that has already been incurred and cannot be recovered. In this case, the cost of the old machine is a sunk cost because it has already been incurred and cannot be recovered whether the company decides to replace the machine or not. Therefore, the amount of $55,000 represents a sunk cost.

Smith Industries Is Considering Replacing a Machine That Is Presently