Question

John invested $12,000 in the stock of Hyper Cyber Eight years later, Hyper Cyber's shares reached $125,000, but John held onto the shares in the belief that their price would double in the next five years. Unfortunately, Hyper Cyber did not double. Rather the market value of John's shares today is $4,000. If the shares were sold and the proceeds invested in another investment, they would likely earn 5% per annum. Which of the following terms and values is correct?
(A) $125,000 is the opportunity cost of selling the shares today
(B) $12,000 is a sunk cost
(C) $250,000 is the opportunity cost
(D) $2000 is the opportunity cost
(E) None of the above

Answer 1

Answer:

Option (B) is correct.

Explanation:

A sunk cost is a cost that was already incurred in the past, alternatively we can say that it is a past cost. These are the costs which cannot be recovered in the future.

The examples of the sunk cost is depreciation expenses, salary expenses, maintenance expense etc.

Therefore, it is not considered in the decision making process which will be held in the future

Since, in the given question, the amount of $12,000 was invested eight years ago which is not recovered now. So, we considered this cost as a sunk cost.