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 refer to costs that have already been incurred and cannot be recovered. In capital budgeting decisions, sunk costs should not be considered because they have no incremental effect on the decision to invest in a project. Only future costs and benefits that are relevant to the decision should be considered, as sunk costs cannot be changed or affected by the decision. Therefore, option C is the correct answer. Options A, B, and D do not provide the appropriate justification for why sunk costs should not be included in capital budgeting decisions.

The Rationale for Not Including Sunk Costs in Capital Budgeting