Question

______ refers to money that has already been spent and which cannot be recovered.
1. Imputed cost
2. Sunk cost
3. Opportunity cost
4. Replacement cost

Answer 1

Correct Answer - Option 2 : Sunk cost

The correct answer is Sunk cost.

• A sunk cost refers to money that has already been spent and which cannot be recovered. Sunk costs are those which have already been incurred and which are unrecoverable. 
• For example, a manufacturing firm may have a number of sunk costs, such as the cost of machinery, equipment, and the lease expense on the factory.
• In business, sunk costs are typically not included in consideration when making future decisions, as they are seen as irrelevant to current and future budgetary concerns.

• Imputed cost or opportunity cost is the cost incurred during the period when an asset is employed for a particular use, rather than redirecting the asset to a different use. This amount is the incremental difference between the two options. 
• The imputed cost can be understood from the following example- suppose a company has a pile of cash that earns only 150 basis points or 1.5 per cent in a money market account. Meanwhile, alternative risk-free securities are yielding 2%. The imputed cost is 50 basis points or 0.5 per cent, the foregone amount that the company would be earning if it invested the cash in the higher-yielding securities.
• Replacement cost is a term referring to the amount of money a business must currently spend to replace an essential asset like a real estate property, investment security, or another item, with one of the same or higher value.