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The sunk cost trap in replacement analysis is the error of

  • A.comparing costs on an annual rather than a present worth basis
  • B.including the challenger's salvage value
  • C.trying to recover past expenditure through the present decision
  • D.using the market value instead of the book value

Answer: C

Correct answer: trying to recover past expenditure through the present decision

The trap is the reasoning that runs “we have too much invested in this machine to scrap it now”. Keeping an uneconomic asset does not recover the money already spent; it merely adds further losses to it. The past expenditure is identical under either course and therefore cannot bear on the choice.

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