Question

Suppose that instead of building a new factory for your project you use available space at an existing facility. Even though the same company owns the project and the facility, and this facility is totally paid for, headquarters insists that you deduct the cost of "rent" of the space as a cost of your project, because otherwise they could have done something else with that same space.

This would be an example of a...

A) Sunk cost.

B) Positive Externality.

C) Negative Externality.

D) Opportunity Cost.

E) Incremental cash flow.

Answer 1

This is an example of Opportunity Cost (Option D).

Opportunity cost is the benefit foregone by taking the alternative.

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