Question

question 13 (5 points)
listen
which of the following statements is correct?
a sunk cost is any cost that must be expended in order to complete a project and bring it into operation.
a sunk cost is any cost that was expended in the past but can be recovered if the firm decides not to go forward with the project.
a sunk cost is a cost that was incurred and expensed in the past and cannot be recovered if the firm decides not to go forward with the project.
sunk costs were formerly hard to deal with, but once the npv method came into wide use, it became possible to simply include sunk costs in the cash flows and then calculate the project’s npv.
a good example of a sunk cost is a situation where home depot opens a new store, and that leads to a decline in sales of one of the firm’s existing stores.

Explanation:

To determine the correct statement about sunk costs, we analyze each option:

• Option 1: Sunk costs are not future costs for project completion; they are past costs. Eliminate.
• Option 2: Sunk costs cannot be recovered, so this description is wrong. Eliminate.
• Option 3: A sunk cost is a past, incurred, and non - recoverable cost if the project is not pursued. This matches the definition of a sunk cost.
• Option 4: Sunk costs should be ignored in NPV calculations as they are irrelevant to future cash flows. So including them is incorrect. Eliminate.
• Option 5: The decline in sales of an existing store due to a new store opening is a cannibalization effect, not a sunk cost. Eliminate.

Answer:

The correct statement is: A sunk cost is a cost that was incurred and expensed in the past and cannot be recovered if the firm decides not to go forward with the project. (The option with this statement among the given choices)