Question

If we are replacing an old vehicle with a newer model, the cost of the old vehicle is:_______.

a. relevant to the decision
b. material to the decision
c. a sunk cost
d. an opportunity cost

Answer 1

Answer:

Option C

It is a sunk cost

Step-by-step explanation:

The relevant cost of a decision is that that would future cash cash flow that arises as a direct consequence of a taking a decision.

In other words, before a sum is considered relevant to a decision , it must satisfy the following condition:

1. Future cost : a cots would only be incurred in the future if the decision is taken
2. It is must involve cash
3. It must arise as direct consequence of taking the decision

The cost of the old machine is a past or sunk cost. It does not satisfy the three conditions listed above. Hence, it is no relevant because it is a sunk or past cost