Collins Inc.is investigating whether to develop a new product.In evaluating whether to go ahead with the project, which of the following items should NOT be explicitly considered when cash flows are estimated?
A) The project will utilize some equipment the company currently owns but is not now using.A used equipment dealer has offered to buy the equipment.
B) The company has spent and expensed for tax purposes $3 million on research related to the new detergent.These funds cannot be recovered, but the research may benefit other projects that might be proposed in the future.
C) The new product will cut into sales of some of the firm's other products.
D) If the project is accepted, the company must invest $2 million in working capital.However, all of these funds will be recovered at the end of the project's life.
E) The company will produce the new product in a vacant building that was used to produce another product until last year.The building could be sold, leased to another company, or used in the future to produce another of the firm's products.

Question

Quizplus · Accepted Answer

Sunk costs, such as the $3 million already spent and expensed for tax purposes on research, should not be considered in the evaluation of future projects because these costs cannot be recovered and do not affect the future cash flows of the new project.