A company paid $200,000 ten years ago for a specialized machine that has no salvage value and is being depreciated at the rate of $10,000 per year.The company is considering using the machine in a new project that will have incremental revenues of $28,000 per year and annual cash expenses of $20,000.In analyzing the new project,the $200,000 original cost of the machine is an example of a(n):
A)Incremental cost.
B)Opportunity cost.
C)Variable cost.
D)Sunk cost.
E)Out-of-pocket cost.

Question

Quizplus · Accepted Answer

The original cost of the machine is a sunk cost, which means it is a cost that has already been incurred and cannot be recovered. It is not relevant to the decision of using the machine in the new project, as it has already been paid for and the company cannot change that. Therefore, it should not be considered in the analysis of the new project's profitability.

A Company Paid $200,000 Ten Years Ago for a Specialized