Question

In a decision to retain or replace equipment, the book value of the old equipment is a (an):

a) Opportunity cost.
b) Cost.
c) Incremental cost.
d) Marginal cost.

Answer 1

In a decision to retain or replace equipment, the book value of the old equipment is considered a sunk cost and not an opportunity, incremental, or marginal cost. The decision should be based on a comparison of incremental costs and benefits, considering the potential benefits of alternative investments of the same funds required to purchase new equipment.

Step-by-step explanation:

In a decision to retain or replace equipment, the book value of the old equipment is not an opportunity cost, which is the value of the best alternative use of resources. Instead, the book value can be considered a sunk cost because it is a historical cost that has already been incurred and cannot be recovered.

According to the concept of opportunity cost, one must consider what is given up to obtain something desired. It represents the value of the next best alternative that is not chosen. For example, the opportunity cost of spending time to read a chapter is the value of the other activities one could have done with that time.