Please answer the two questions below: Which of the following statements is CORR

Question

Please answer the two questions below:

Which of the following statements is CORRECT? You need to spend a sunk cost to make the project feasible A sunk cost is a cost that can be refunded if you reject the project A sunk cost is money spent that cannot be avoided even if you reject the project You must always include sunk cost into your NPV analysis since it has been spent You can exclude sunk cost in an IRR calculation but not in an NPV calculation Calculate the required rate of return for Nashua Inc.. assuming that (1) the risk-free rate is 7%. (2) the expected return on the market portfolio is 12%. (3) the firm has a beta of 1.20. and (4) its realized rate of return has averaged 15.0% over the last 5 years.

Explanation / Answer

Hi,

Please find the answers as follows:

Part A:

Option C (A sunk cost is money spent that cannot be avoided even if you reject the project) is the correct answer.

Part B:

Required Rate of Return = Risk Free Rate + Beta*(Market Return - Risk Free Rate) = 7 + 1.20*(12 - 7) = 13%

Option E (13%) is the correct answer.

Thanks.

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