Finance

Which of the following statements is CORRECT?

Answer

An example of a sunk cost is the cost associated with restoring the site of a strip mine once the ore has been depleted.

Sunk costs must be considered if the IRR method is used but not if the firm relies on the NPV method.

A good example of a sunk cost is a situation where a bank opens a new office, and that new office leads to a decline in deposits of the bank’s other offices.

A good example of a sunk cost is money that a banking corporation spent last year to investigate the site for a new office, then expensed that cost for tax purposes, and now is deciding whether to go forward with the project.

If sunk costs are considered and reflected in a project’s cash flows, then the project’s calculated NPV will be higher than it otherwise would be.