A company paid $200,000 ten years ago for a specialized machine that has no salvage value and is being depreciated at the rate of $10,000 per year. The company is considering using the machine in a new project that will have incremental revenues of $28,000 per year and annual cash expenses of $20,000. In analyzing the new project, the $10,000 depreciation on the machine is an example of a(n):

Question

Quizplus · Accepted Answer

The $10,000 depreciation on the machine is a sunk cost because it is a historical cost that has already been incurred and cannot be recovered. Sunk costs should not be considered in decision-making as they are irrelevant to future cash flows.

A Company Paid $200,000 Ten Years Ago for a Specialized