Discussion
A manager refuses to replace a machine because 400 000 was spent on it two years ago. The objection to this reasoning is that the 400 000 is
Answer: C
Correct answer: sunk and identical whichever course is taken
The 400,000 has gone and cannot be recovered by either decision, so it cannot distinguish between them. Keeping an uneconomic machine to avoid admitting the loss simply adds the excess running costs to that loss. The relevant figures are the machine’s market value now and the costs of the two courses from here on.
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