Which of the Following Statements Is CORRECT

question 50

Multiple Choice

Which of the following statements is CORRECT?

• A) Sunk costs must be considered if the IRR method is used but not if the firm relies on the NPV method.
• B) 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.
• C) 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.
• D) 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 be.
• E) An example of a sunk cost is the cost associated with restoring the site of a strip mine once the ore has been depleted.

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Definitions:

Development Phase

A stage in the lifecycle of a project or product focused on research, design, and development activities before commercial production begins.

Volatility

A statistical measure of the dispersion of returns for a given security or market index, often used to quantify the risk of a security or portfolio.

Full Cost Method

An accounting method used in the oil and gas industry where all exploration, development, and production costs are capitalized and amortized over the life of reserves.

Impaired Indicators

Warning signs or evidence that an asset's value has decreased significantly, necessitating a review for potential impairment.