Question

Which of the following statements is CORRECT?a. An example of a sunk cost is the cost associated with restoring the site of a strip mine once the ore has been depleted.b. Sunk costs must be considered if the IRR method is used but not if the firm relies on the NPV method.c. 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.d. 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.e. 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 have been had the sunk costs been ignored.

Answer 1

Answer: The correct answer is "d. 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."

Explanation: Sunk costs are those costs that have already been incurred and cannot be recovered in the future. Including the time, money or other resources that were spent on a project, investment or other activity and that will not be recovered.