Question

You discover the engine-oil additive your scientists developed three years ago makes a great men’s after-shave once diluted properly using certain chemicals. How should you treat the original $125,000 of R&D expenditures that went into developing the engine-oil additive for your present decision regarding whether or not to begin production of the after-shave? a. Treat it as a cash outflow three years ago for the current project; that is, find the future value today of the $125,000 spent three years ago.

Answer 1

Answer: e. As a sunk cost since the R&D expenditure has no bearing on today's investment decision.

Step-by-step explanation:

Sunk Costs are not to be factored in when making decisions because they have already been incurred and cannot be recovered.

This R&D expense should therefore be treated as a sunk cost because it has already been incurred and expensed and does not contribute to the decision today to embark on the men's after-shave venture.