Question

You are advising Peter who is attempting to decide whether or not to drop one of the college courses he is currently enrolled in. If he drops the course, he will forfeit half of the money spent on tuition. If he stays in the class, he will have to give up his part-time job. His textbook is being replaced by a new edition, so is worthless at this time. Which of the following conclusions is consistent with capital budgeting principles?I. Remaining in the class incurs an opportunity cost.II. The entire tuition is irrelevant because it is a sunk cost.III. The cost of the book is a sunk cost.A) I onlyB) I and II onlyC) I and III onlyD) II and III onlyE) I, II, and III

Answer 1

Answer:

(E) I, II, and III

Explanation:

I. Remaining in the class incurs an opportunity cost.

II. The entire tuition is irrelevant because it is a sunk cost.

III. The cost of the book is a sunk cost.

An opportunity cost is the cost incurred when we choose to forgo an alternative option.

Sunk costs are costs that once they have been incurred or spent, they cannot be recovered or gotten back.

If Peter chooses to remain in the class, then he gives up his part-time job. The salary he would have made from the part-time job within that period of time is an opportunity cost he will have to forgo.

Also, the tuition fee and the cost of the textbook (which is now an old edition and worthless) have already been spent and cannot be recovered, therefore they are sunk costs.