You are evaluating whether to retire your current computer modem and replace it with a new modem that incorporates new features. Which of the following would not be relevant to your decision-making process?[Fill in the blank]

Question

BlackTom AI · Accepted Answer

In evaluating whether to retire the current modem and replace it with a new one, we must distinguish between relevant (differential) costs and irrelevant (sunk) costs.
Option a: Equipment you own with a market value of $30,000 that can be used to build the new modems. This is relevant because it represents an opportunity cost of using the asset differently or selling it to finance the new modem; its value affects the net decision.
Option b: Installation and transportation costs of $500 used to set up the new modem. These are incremental costs directly tied to the new purchase; they would be incurred only if you replace the modem, so they are relevant.
Option c: $25,000 in salvage value you will receive for scrapping the old modem’s obsolete production equipment. Salvage value is a cash inflow associated with discarding the old asset, reducing the net cost of replacement; it is a relevant consideration.
Option d: $50,000 spent on research and development costs for the older modem. This is a sunk cost—these costs have already been incurred and cannot be recovered by replacing the modem. Since past expenditures do not change with the current decision, they are not relevant to the replacement choice.
Thus, the only option that would not be relevant to your decision-making process is the $50,000 R&D cost for the older modem, because it is a sunk cost that should be ignored when evaluating future alternatives.

You are evaluating whether to retire your current computer modem and replace it with a new modem that incorporates new features. Which of the following would not be relevant to your decision-making process?[Fill in the blank]

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