A Canadian oil company is considering whether or not to develop a site it has been exploring for the past six months.One of the arguments for developing the site is that considerable time and money have already been expended.This cost should not be included in the capital budgeting decision because it is:

Question

Quizplus · Accepted Answer

The cost incurred in the past, such as the money and time spent on exploring the site, is a sunk cost. Sunk costs are irrelevant in capital budgeting decisions because they cannot be recovered regardless of whether the project is accepted or rejected. Therefore, the fact that considerable time and money have already been expended should not influence the decision to develop the site.

A Canadian Oil Company Is Considering Whether or Not to Develop