Raptor Company is considering replacing equipment which originally cost $500,000 and which has $460,000 accumulated depreciation to date. A new machine will cost $790,000 and the old equipment can be sold for $8,000. What is the sunk cost in this situation?

a. $40,000b. $37,000c. $290,000d. $53,000

Option (a) is correct.

Explanation:

Sunk cost refers to a cost that is already incurred and cannot be recovered. It cannot be changed from any future decision.

Given that,

Original cost of the equipment = $500,000

Accumulated depreciation = $460,000

Sunk cost in this situation:

= Original cost of the equipment - Accumulated depreciation

= $500,000 - $460,000

= $40,000