Which of the following statements is CORRECT?
A) A sunk cost is any cost that was expended in the past but can be recovered if the firm decides not to go forward with the project.
B) A sunk cost is a cost that was incurred and expensed in the past and cannot be recovered if the firm decides not to go forward with the project.
C) Sunk costs were formerly hard to deal with but now that the NPV method is widely used, it is possible to simply include sunk costs in the cash flows and then calculate the PV of the project.
D) A good example of a sunk cost is a situation where Home Depot opens a new store, and that leads to a decline in sales of one of the firm's existing stores.
E) A sunk cost is any cost that must be expended in order to complete a project and bring it into operation.

Question

Quizplus · Accepted Answer

A sunk cost is a cost that has already been incurred and cannot be recovered if the firm decides not to go forward with the project. This cost should not be considered in deciding whether to go forward with the project, as it no longer affects the cash flows of the project. Instead, only future costs and benefits should be considered when making the decision. Option A is incorrect because a sunk cost cannot be recovered. Option C is incorrect because sunk costs should not be included in cash flows. Option D is incorrect because a decline in sales of an existing store is not a sunk cost. Option E is incorrect because any cost that must be expended to complete a project is not necessarily a sunk cost.

Which of the Following Statements Is CORRECT