Identify each of the following situations as involving sunk costs
Identify each of the following situations as involving sunk costs, opportunity costs, and/or cannibalization. Indicate what amount, if any, of these items would be relevant to the given investment decision.
a. The investment requires use of additional computer storage capacity to create a data warehouse containing information on all of your customers. The storage space you will use is currently leased to another firm for $37,500 per year under a lease that can be canceled without penalty by you at any time.
b. An investment that will result in producing a new lighter-weight version of one of the firm’s best-selling products. The new product will sell for 40% more than the current product. Because of its high price, the firm expects the old product’s sales to decline by about 10% from its current level of $27 million.
c. An investment of $8 million in a new venture that is expected to grow sales and profits. To date you have spent $135,000 researching the venture and performing feasibility studies.
d. Subleasing 100 parking spaces in your firm’s parking lot to the tenants in an adjacent building that has inadequate off-street parking. You pay $20 per month for each space under a non cancelable 50-year lease. The sub lessee will pay you $15 per month for each space. You have advertised the spaces for over a year with no other takers and you do not anticipate needing the 100 spaces for many years.
e. The firm is considering launching a completely new product that can be sold by your existing sales force, which is already overburdened with a large catalog of products to sell. On average, each sales rep sells about $2.1 million per year. You expect that given the extra time involved in selling the new product, your sales reps will likely devote less time to selling existing products. Although you forecast that the average sales rep will sell about $300,000 of the new product annually, you project a decline of about 7% per year in existing product sales.
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