Sunk costs and opportunity costs Masters Golf Products, Inc., spent 2 years and

Question

Sunk costs and opportunity costs Masters Golf Products, Inc., spent 2 years and $1,060,000 to develop its new line of club heads to replace a line that is becoming obsolete. To begin manufacturing them, the company will have to invest $1,820,000 in new equipment. The new clubs are expected to generate an increase in operating cash inflows of $745,000 per year for the next 12 years. The company has determined that the existing line could be sold to a competitor for $244,000 a. How should the $1,060,000 in development costs be classified? b. How should the $244,000 sale price for the existing line be classified? c. What are all the relevant cash flows for years 0 thru 12? (Note: Assume that all of these numbers are net of taxes.) a. How should the $1,060,000 in development costs be classified? (Select the best answer below.) OA. The $1,060,000 development costs should be considered part of the decision to go ahead with the new production. This money has already been spent as part of the opportunity cost of O B. The $1,060,000 development costs should not be considered part of the decision to go ahead with the new production. This money has already been spent and cannot be retrieved so it O C. The $1,060,000 development costs should not be considered part of the decision to go ahead with the new production. This money has already been spent and cannot be retrieved so it O D. The $1,060,000 development costs should be considered part of the decision to go ahead with the new production. This money has already been spent as part of the investment project. the project. is a sunk cost. is an opportunity cost.

Explanation / Answer

Option B

The 1060000 development costs should not be considered part of the decision to go ahead with the new production. This money has laready been spent and cannot be retrieved so it is sunk cost

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