Which of the Following Is an Example of a Sunk

question 117

Multiple Choice

Which of the following is an example of a sunk cost in a capital budgeting decision regarding the replacement of an existing piece of equipment for a profitable business that pays taxes?

• A) The disposal (salvage) value of the equipment to be replaced.
• B) The original purchase price of the equipment to be replaced.
• C) The additional net working capital requirement.
• D) The operating cost of the new equipment.
• E) Income taxes on the disposal of the equipment to be replaced.

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Definitions:

Present Value Methods

Techniques used to determine the current worth of a future cash flow, stream of cash flows, or an investment, by discounting them at a specific rate.

Net Present Value

A financial metric that calculates the value of a project or investment in terms of its present value of net cash inflows minus the present value of its costs.

Cash Payback Period

The length of time it takes for an investment or project to generate enough cash flows to recover its initial cost.

Present Value Factor

The present value factor is a factor used to calculate the present value of a future amount, considering a specific interest rate over a set period.