Which of the following statements is CORRECT?
A) Sunk costs must be considered if the IRR method is used but not if the firm relies on the NPV method.
B) A good example of a sunk cost is a situation where a bank opens a new office, and that new office leads to a decline in deposits of the bank's other offices.
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 that cost 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.
E) An example of a sunk cost is the cost associated with restoring the site of a strip mine once the ore has been depleted.

Question

Quizplus · Accepted Answer

Sunk costs are past costs that have already been incurred and cannot be recovered. They should not influence the decision-making process for future investments. Choice C correctly identifies a sunk cost as the money spent and expensed for tax purposes on investigating a site for a potential new office, which is now a past expense irrelevant to the decision on whether to proceed with the project.

Which of the Following Statements Is CORRECT