If a decision must be made to replace a machine, the book value of the existing machine is a sunk cost and is, therefore, ignored in the decision process.

Question

Quizplus · Accepted Answer

Sunk costs are costs that have already been incurred and cannot be recovered. In a decision-making process, sunk costs should be ignored because they are irrelevant to the future costs and benefits of the decision. The book value of the existing machine is a sunk cost because it represents the historical cost of the machine and has no bearing on the future costs and benefits of replacing it. Therefore, it should be ignored in the decision process.

If a Decision Must Be Made to Replace a Machine