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All of the following are usually included in an engineering economic analysis except
Fixed cost
Variable cost
Sunk cost
Total revenue
Sunk cost
Engineering economic analysis focuses on evaluating the future consequences of investment decisions, specifically considering incremental costs and benefits. Sunk costs are excluded because they represent past expenditures that cannot be recovered or altered, and thus have no relevance to future decision-making.
Engineering economic analysis focuses on evaluating the future consequences of investment decisions, specifically considering incremental costs and benefits. Sunk costs are excluded because they represent past expenditures that cannot be recovered or altered, and thus have no relevance to future decision-making.
NPV=тИСt=0nтАЛ(1+i)tRtтАЛтИТCtтАЛтАЛ тАФ Net Present Value where CtтАЛ represents relevant future costs.
Incremental┬аCost=CostAlternativeBтАЛтИТCostAlternativeAтАЛ тАФ Used for comparison, excluding any shared sunk costs.
The principle of 'Irrelevance of Sunk Costs' dictates that in any capital budgeting or economic evaluation, only prospective cash flows matter. Since a sunk cost is incurred regardless of whether an investment alternative is accepted or rejected, it does not influence the relative economic merit of competing alternatives.
Fixed costs remain constant regardless of production volume.
Variable costs change proportionally with the level of output.
Sunk costs are past expenditures (e.g., R&D, market research) that cannot be retrieved.
Economic analysis strictly evaluates prospective differences between alternatives.
Focuses resources on profitable future projects.
Prevents escalation of commitment to failing ventures.
Psychological bias (sunk cost fallacy) often leads stakeholders to ignore economic logic.
Accurately separating sunk vs. future costs can sometimes be complex in accounting.
Capital budgeting for new power plant projects.
Equipment replacement analysis in industrial manufacturing.
Project feasibility studies.
In accounting terms, sunk costs are sometimes considered during the initial assessment of a business, but in engineering economics, they are irrelevant for 'Replace vs. Keep' or 'Buy vs. Lease' decisions.
Total revenue is a primary component as it defines the inflow of funds, directly impacting the profitability metrics of an investment.
C is correct тАФ Sunk costs are past expenditures that are independent of any future decision and are therefore excluded from engineering economic analysis.
Always verify if a cost is 'prospective' (future) or 'retrospective' (past); only prospective cash flows belong in your Cash Flow Diagram (CFD).