Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Sunk and opportunity cash flows Dave and Ann Stone have been living at their current home for the past 6 years. During that time, they
Sunk and opportunity cash flows Dave and Ann Stone have been living at their current home for the past 6 years. During that time, they have replaced the water heater for $371, replaced the dishwasher for $622, and have had to make miscellaneous repair and maintenance expenditures of approximately 51,530. They have decided to move out and rent the house for $995 per month. Newspaper advertising will cost $73. Dave and Ann intend to paint the interior of the home and powerwash the exterior. They estimate that will run about $884. The house should be ready to rent after that. In reviewing financial situation, Dave views all the expenditures as being relevant, and so he plans to net out the estimated expenditures discussed above from the rental income. a. Do Dave and Ann understand the difference between sunk costs and opportunity costs? Explain the two concepts to them. b. Which of the expenditures should be classified as sunk costs and which should be viewed as opportunity costs? a. Do Dave and Ann understand the difference between sunk costs and opportunity costs? Explain the two concepts to them. (Select the best answer below.) A. Sunk costs are any added costs necessary to get an asset into operation. Opportunity costs are cash flows that could be realized from the next best alternative use of an owned asset. O B. Sunk costs are cash flows that could be realized from the next best alternative use of an owned asset. Opportunity costs are costs that have already been incurred and thus the money has already been spent. OC. Sunk costs are costs that have already been incurred and thus the money has already been spent. Opportunity costs are any added costs necessary to get an asset into operation. OD. Sunk costs are costs that have already been incurred and thus the money has already been spent. Opportunity costs are cash flows that could be realized from the next best alternative use of an owned asset. b. Which of the expenditures should be classified as sunk cash flows and which should be viewed as opportunity cash flows? Water heater replacement: (Select from the drop-down menu.) Dishwasher replacement: (Select from the drop-down menu.) Miscellaneous repair and maintenance expenditures: (Select from the drop-down menu.) Newspaper advertising: (Select from the drop-down menu.) Interior paint and exterior powerwash: (Select from the drop-down menu.)
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started