Practice Quiz

CLEP Management

Category - CLEP Management

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Titanic Inc. is reviewing its existing projects; $10 million has already been spent on Project Iceberg but another $20 million is required. The project is expected to provide riskless cash flows with a present value of $28 million once it is completed. Should Titanic proceed?
  1. Definitely
  2. Maybe
  3. No
Explanation
Answer: a - Titanic should compare Project Iceberg against its other projects to see if they can invest the money better elsewhere. However, the key is recognizing that the $10 million already spent is a sunk cost. The decision now is whether to spend the last $20 million to get the $28 million.

Key Takeaway: Expended money is a sunk cost. It’s hard to accept sometimes, but companies must make decisions on the value on the table moving forward versus the future investment required.
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