Which one of the following is an example of a sunk cost?

• A. Money spent on non-refundable equipment for a business
• B. Wages paid to employees for upcoming work
• C. Expected profits from a new project
• D. Future payments for raw materials

Answer: (A)

Verified step by step guidance

1. Understand the definition of a sunk cost: a sunk cost is a cost that has already been incurred and cannot be recovered, regardless of future actions.
2. Analyze each option to determine if the cost is irreversible and already spent (sunk) or if it is a future or recoverable cost.
3. For 'Money spent on non-refundable equipment for a business,' recognize that this money has already been spent and cannot be recovered, making it a sunk cost.
4. For 'Wages paid to employees for upcoming work,' note that these are future costs and can be avoided if the work is not done, so they are not sunk costs.
5. For 'Expected profits from a new project' and 'Future payments for raw materials,' understand these are potential future gains or costs, not costs already incurred, so they are not sunk costs.