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Sunk Cost and Net Present Value

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.

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?

$28,289.13
$31,323.02
$25,497.21
$22,523.69
$14,390.24

Solution Preview

A sunk cost is:

a cost that has already been incurred and cannot be recouped.

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 ...

Solution Summary

This solution provides the answer regarding to what a sunk cost is, as well as calculations for initial investment, annual pre-tax profits, annual post-tax profits, annual cash flows from operations, present value of cash flows from operations, present value of working capital recovery at the end, and finally net present value.

$2.19