Question

A __________ cost is a cost that has already occurred and should not be used in...

A __________ cost is a cost that has already occurred and should not be used in calculating the NPV of a project.

C. opportunity
B. sunk
D. none of the above
A. property, plant and equipment
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Answer #1

B. Sunk cost:

Sunk cost is a cost that cannot be changed in future. It will incurr irrespective of activities you are going to perform in future so it is irrelevant for decesion making. So while calculating NPV sunk cost not considered.

Opportunity costs are the benefits foregoing to earn more return on investment.
Even though you can profit by investing in a particular project you are losing it and investing elsewhere more profit can earn more than the previous one so these will consider in NPA Computation.

and purchase of an equipment makes cash outflow as there is no purchase no outflow of cash. Hence the purchase of equipment is considered in calculating NPA

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