A company paid $200,000 ten years ago for a specialized machine that has no salvage value and is being depreciated at the rate of $10,000 per year. the company is considering using the machine in a new project that will have incremental revenues of $28,000 per year and annual cash expenses of $20,000. in analyzing the new project, the $200,000 original cost of the machine is an example of a (n) :

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21 July, 17:40

A company paid $200,000 ten years ago for a specialized machine that has no salvage value and is being depreciated at the rate of $10,000 per year. the company is considering using the machine in a new project that will have incremental revenues of $28,000 per year and annual cash expenses of $20,000. in analyzing the new project, the $200,000 original cost of the machine is an example of a (n) :

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Sloane · Answer 1

A cost which is already incurred and cannot be recovered is called as Sunk Cost. In this case the company has already paid $200,000 ten years ago for the specialized machine, even if the company takes a new project or remains with the old project, the cost $200,000 is already incurred and will not be recovered, hence it is a sunk cost.

The original cost of $200,000 is an example of sunk cost.