Your company just paid $100,000 for a plot of land to build a factory on, outbidding the next highest company by $15,000.
You discover that it is contaminated and the government will not let you build on it or use it for any purpose. You have ________ in sunk costs.
A. $0
B. $15,000
C. $85,000
D. $100,000

Question

Your company just paid $100,000 for a plot of land to build a factory on, outbidding the next highest company by $15,000. 
You discover that it is contaminated and the government will not let you build on it or use it for any purpose. You have ________ in sunk costs.
A.    $0
B.    $15,000
C.    $85,000
D.    $100,000

BlackTom AI · Accepted Answer

Sunk costs are expenditures already incurred and unrecoverable — in this case the entire $100,000 purchase price.

1. Relevant knowledge points and concepts
- Sunk cost: a past payment that cannot be recovered and should not affect future decisions.
- Opportunity cost and bidding: the fact you outbid someone else affects regret or foregone alternatives, but does not change what money is irretrievably spent.
- Irreversibility: if the government forbids any use, the paid amount is nonrecoverable.

2. Complete reasoning step by step
- You paid $100,000 for the land. That payment is an outlay that has already occurred.
- The government’s prohibition on any use means you cannot extract value from the land (no building, no productive use).
- Therefore the $100,000 cannot be recovered through use and is unrecoverable — by definition, sunk.

3. Calculations and intermediate steps
- Next-highest bid = your payment − margin = $100,000 − $15,000 = $85,000.
- That $85,000 is simply what the second bidder would have paid; it does not change the fact you actually paid $100,000.
- There is no calculation that reduces the sunk amount below $100,000 because no portion of the $100,000 can be recovered.

4. Why the correct answer is correct
- Because a sunk cost equals the total unrecoverable expenditure. Since the land cannot be used or repurposed and you already paid $100,000, the entire $100,000 is sunk.

5. Why the other options are incorrect
- A ($0): wrong — money was spent and is unrecoverable, so sunk cost is not zero.
- B ($15,000): wrong — $15,000 is the amount you outbid the next firm (the margin), not the total unrecoverable payment.
- C ($85,000): wrong — $85,000 is the next bidder’s amount (100,000 − 15,000), but you actually paid $100,000; the full payment is sunk.

6. Conclusion
The sunk cost is $100,000, so the correct answer is D, which matches the provided answer.

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