Why is the original purchase price of an old machine that is being replaced never included in capital budgeting decisions?
A)It is an opportunity cost, and thus not relevant.
B)No future cash flows are associated with its purchase.
C)It will affect future costs.
D)It is a cost expensed when the new machine is acquired.

Question

Quizplus · Accepted Answer

The original purchase price of an old machine that is being replaced is a sunk cost and has already been incurred. Capital budgeting decisions focus on future cash flows, and the original purchase price cannot be recovered nor does it generate any future cash flows. Thus, it is not included in the analysis.

Why Is the Original Purchase Price of an Old Machine