Please explain the difference between a sunk cost and an opportunity c

Please explain the difference between a sunk cost and an opportunity cost and give an example of each type of cost.

What will be an ideal response?

ANSWER

Sunk costs are cash outlays that have already been made (past outlays) and cannot be recovered. Sunk costs have no effect on the cash flows relevant to the current decision. As a result, sunk costs should not be included in a project’s incremental cash flows.

Opportunity costs are cash flows that could be realized from the best alternative use of an asset that is already in place. They, therefore, represent cash flows that will not be realized as a result of employing that asset in the proposed project. Thus, any opportunity costs should be included as cash outflows when one is determining a project’s incremental cash flows.