The rationale for not including sunk costs in capital budgeting decisions is that they:
A)Are usually small in magnitude
B)Revert at the end of the investment
C)Have no incremental effect
D)Reduce the estimated NPV

Question

Quizplus · Accepted Answer

Sunk costs are costs that have already been incurred and cannot be recovered. They have no incremental effect on future cash flows and should therefore not be considered in capital budgeting decisions. Focusing on sunk costs can reduce the estimated net present value (NPV) of an investment and lead to suboptimal decision-making. It is better to focus on the incremental cash flows that a project is expected to generate in the future.

The Rationale for Not Including Sunk Costs in Capital Budgeting