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Flourish Co. is considering replacing a machine that originally cost $850,000 and has $500,000 accumulated depreciation...

Flourish Co. is considering replacing a machine that originally cost $850,000 and has $500,000 accumulated depreciation to date. A new machine will cost $450,000.
What is the sunk cost in this situation?

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Answer #1

Solution:

Sunk costs are defined as those costs which are incurred in the past and it is no longer recoverable at all.

In the above case the sunk cost is BOOK VALUE i.e $ 3,50,000 ( $ 8,50,000 cost - $ 5,00,000 accumulated depreciation) of the present machine. The original cost and accumulated depreciation which were incurred in the past are irrelevant for decision making on replacing the machinery.

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