1.6. Irrelevance of Past Estimates

Try these first

1. 1.

   What is the definition of sunk cost?

   Hint

   Think about costs already incurred.

2. 2.

   Why should we focus on current market value?

   Hint

   Consider what affects current choices.

3. 3.

   What should you exclude from your replacement analysis?

   • Initial purchase cost
   • Current market value
   • Maintenance cost

   Hint

   Which reflects today’s situation better?

4. 4.

   Are sunk costs relevant in making replacement decisions?

   • True
   • False

   Hint

   Consider past costs versus future values.

5. 5.

   A construction company initially invested $200,000 in a bulldozer. After 10 years, the current market value is$50,000. They have maintained it well, but operational costs are increasing. Outline their decision process based on replacement analysis.

   Hint

   Focus on current financial implications rather than previous investments.

6. 6.

   Explain a scenario where failing to recognize sunk costs might lead a manager to delay a beneficial equipment replacement.

   Hint

   Consider emotions tied to money spent in the past.