In January 2014, Digital Advantage, an electronics retailer located in Sacramento, plans to open a new store in Tacoma. The CEO expects to sign a 12-month lease on a 10,000 square foot retail store in a newly constructed mall. The lease amount is $144,000 for the year 2014 with an agreement that Digital Advantage will make 12 monthly lease payments of $12,000 on the first day of each month. During the 12-month period of the lease contract, should the manager of Digital Advantage consider the monthly payments of $12,000 avoidable or sunk costs? Why does it matter whether the lease payments are avoidable or sunk costs since, in either case, the lease payment must be paid to prevent immediate eviction from the property?
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