Which of the following statements is most correct?
A) Sunk costs should be ignored in capital budgeting.
B) Opportunity costs should be ignored in capital budgeting.
C) Externalities should be ignored in capital budgeting.
D) Answers a,b,and c are all correct.
E) Answers a,b,and c are all incorrect.

Question

Quizplus · Accepted Answer

Sunk costs, which are costs that have already been incurred and cannot be recovered, should indeed be ignored in capital budgeting decisions. This is because capital budgeting focuses on future cash flows and the incremental costs and benefits of a project. Sunk costs do not change regardless of the decision made about a future project, so they do not affect the incremental cash flows associated with a project. On the other hand, opportunity costs and externalities are relevant to capital budgeting decisions as they can affect the future cash flows and the overall impact of a project.

Which of the Following Statements Is Most Correct