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 on project cash flows.
D) reduce the project's net present value.

Question

Quizplus · Accepted Answer

Sunk costs are costs that have already been incurred and cannot be recovered. Since they are not relevant to future cash flows or the incremental impact of a project, they should not be considered in capital budgeting decisions. Including sunk costs would reduce the project's net present value, which would be a mistake. Therefore, the best choice is C.

The Rationale for Not Including Sunk Costs in Capital Budgeting