Question

Last year, you purchased land to build a retail store. You paid $20 million for the land. Another business has now offered $8 million for the land and that is the highest price your business should now be able to get for the land. Which of the following costs is relevant for your decision as to whether or not you should build a new retail store?

Answer 1

The only cost that matters in this case is $8 million. Note that the cost that is incurred a year before which is $20 milliion. This implies that this cost is now the sunk cost and it cannot be recovered. Since $8 million is the best price that is available to determine the value of land in current period, it is the only valuable amount. Sunk cost is not considered for making investment decision because it has been spent in the past and cannot and should not influence the current economic decisions.