The Rationale for Not Including Sunk Costs in Capital Budgeting

question 91

Multiple Choice

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.

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Definitions:

Financial Advantage

The benefit gained in financial terms, which can result in better profitability or cost savings.

Fixed Manufacturing Expenses

Costs associated with production that do not vary with the level of output, including salaries of permanent staff and depreciation of machinery.

Fixed Selling

Refers to the selling expenses that do not change with the level of sales.

Financial Disadvantage

A situation where a person or entity is in a less favorable financial position compared to others due to various factors.