Question

please add the explanation

10. The government has been trying to decide whether or not to purchase any of the new, advanced missiles it has developed. One of the arguments in favor of purchasing the missiles is that since so much money has been spent on their development it would be a waste of money not to buy them now. What is the major problem with this argument?

A) It includes erosion costs in the decision-making process.

B) It includes sunk costs in the decision-making process.

C) It includes opportunity costs in the decision-making process.

D) It includes net working capital changes in the decision-making process.

E) It includes financing costs in the decision-making process.

Answer 1

C) It includes opportunity costs in the decision-making process.

REASON :

• Opportunity cost is the return of a foregone option less than the return on your chosen option.Considering opportunity costs can guide you to more profitable decision-making.You must assess the relative risk of each option in addition to its potential returns.The cost of passing up the next best choice when making a decision. For example, if an asset such as capital is used for one purpose, the opportunity cost is the value of the next best purpose the asset could have been used for. Opportunity cost analysis is an important part of a company's decision-making processes, but is not treated as an actual cost in any financial statement.
  
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• A sunk cost refers to money that has already been spent and which cannot be recovered. In business, the axiom that one has to "spend money to make money" is reflected in the phenomenon of the sunk cost. A sunk cost differs from future costs that a business may face, such as decisions about inventory purchase costs or product pricing. Sunk costs are excluded from future business decisions because the cost will remain the same regardless of the outcome of a decision.
• Erosion can include any negative impact on a company’s associated assets or funds. Erosion can be experienced with regard to profits, sales, or tangible assets, such as manufacturing equipment. Erosion is often considered a general risk factor within an organization’s cash management system, as the losses may be slow and occurring over time.
• Financing cost means the total expenses associated with securing financing for a project or business arrangement. Financing costs may include interest payments, financing fees charged by intermediary financial institutions, and the fees or salaries of any personnel required to complete the financing process.