Question

Determine whether the statement is true or false.

1- Sunk costs can be ignored in engineering economic decision making because a sunk cost is money already spent and therefore does not have any consequence on decision making for the future.

2- Direct Costs are all the costs associated with directly running the business, such as engineering, management salaries, maintaining the IT, HR & Marketing departments.

3-Overhead is another term for direct costs.

4- Fixed Costs are those costs unaffected by production volumes, such as rent, R&D and management salaries.

5- When using IRR to make a decision, you should invest in a project only if the project IRR is less than your company's MARR.

6- Cost of Asset - Depreciation charges taken to date = Book Value

Answer 1

1) Solution: True
Explanation: Sunk costs is irrelevant cost because the money is already spent and will not have any impact on decision making

2) Solution: False
Explanation: The "General and administrative expenses" deals with the costs associated with directly running the enterprise

3) Solution: False
Explanation: Overhead are the ongoing costs for operating the company however excludes the associated direct costs.

4) Solution: True
Explanation: Fixed Costs are fixed and remains constant and unchanged irrespective of change in production volumes

5) Solution: False
Explanation: Invest in a project when the IRR exceeds or equals MARR

6) Solution: True
Explanation: The book value is computed as asset cost minus accumulated depreciation