Question 1: A sunk cost is:
- the value of an asset currently owned by a firm.
- a cost for which there is no alternative option.
- another name for a fixed cost.
- a cost that has already been incurred and cannot be recouped.
- a form of erosion.
Question 2: Fun Land is considering adding a miniature golf course to its facility. The course would cost $64000, would be depreciated on a straight line basis over its 4-year life, and would have a zero salvage value. The estimated income from the golfing fees would be $46500 a year with $17500 of that amount being variable cost. The fixed cost would be $12000. In addition, the firm anticipates an additional $14000 in revenue from its existing facilities if the course is added. The project will require $13000 of net working capital, which is recoverable at the end of the project. What is the net present value of this project at a discount rate of 6 percent and a tax rate of 35 percent?