Which of the Following Statements Is CORRECT

question 20

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:

Revaluation of Machinery

The process of updating the book value of machinery to reflect its current market value.

Accumulated Depreciation

The total amount of depreciation expense that has been claimed on an asset since it was put into use, reducing its book value.

Gain on Revaluation

An increase in the value of an asset based on current market prices, resulting in a higher estimated worth than its recorded book value.

Estimated Useful Life

The length of time an asset is expected to be usable for its intended purpose, used to calculate depreciation.