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Question:
Timely Taxis, Ltd. has signed a long-term lease for 20 underground parking spots at $ 150 each per month for its fleet of taxis. The firm currently has 18 taxis in operation and is performing an NPV analysis on the purchase of a 19th taxi. The cost of parking for the 19th taxi is best described as a(n):
A
sunk cost.
explanation
The 19th space is neither an incremental cost, nor an opportunity cost or a type of cannibalization. It is a sunk cost since the firm has already committed to parking for 20 taxis. The cost of the 19th parking space is not directly relevant to the capital budgeting decision.
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