Question

Valley Forge and Metal purchased a truck five years ago for local deliveries. Which one of the following costs related to this truck is the best example of a sunk cost? Assume the truck has a usable life of eight years.
1. New tires that will be purchased this winter
2. Costs of repairs needed so the truck can pass inspection next month
3. Money spent last month repairing a damaged front fender
4. Engine tune-up that is scheduled for this afternoon
5. Cost for a truck driver for the remainder of the truck's useful life

Answer 1

The correct option is - 3 ( "Money spent last month repairing a damaged front fender" )

Explanation:

Sunk cost means the cost that has been already incurred in the past and cannot be recovered. This implies that sunk costs should be not be considered in future decision making of the project, because these are the cost that can not be changed with under taking the project or not. The significant aspect  about this costs is that they shouldn't be allowed to influence subsequent decisions.

With the theatre ticket example, there's an opportunity to leave the theatre at the intermission and spend the rest of your evening doing something else more enjoyable.  If you don't like the play then you might decide to leave, but the sunk cost of the ticket shouldn't influence your decision to stay or leave.