A company paid $400,000 five years ago for a specialized machine that has no salvage value and is being depreciated at the rate of $40,000 per year.The company is considering using the machine in a new project that will have incremental revenues of $48,000 per year and annual cash expenses of $30,000.In analyzing the new project,the $40,000 depreciation on the machine is an example of a(n):
A) Incremental cost
B) Opportunity cost
C) Variable cost
D) Sunk cost
E) Out-of-pocket cost

Question

Quizplus · Accepted Answer

The $40,000 depreciation on the machine is a sunk cost, which is a cost that has already been incurred and cannot be recovered. It is not relevant in the decision-making process for the new project because it will not affect future cash flows. Incremental costs are the additional costs that will be incurred as a result of the new project, opportunity costs are the benefits foregone from choosing one option over another, variable costs change with the level of output or sales, and out-of-pocket costs are the actual cash payments made for a particular expense. None of these terms apply to the $40,000 depreciation expense for the machine.

A Company Paid $400,000 Five Years Ago for a Specialized