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The sunk costs may include
A past expenditure that is currently irrelevant
An unrecoverable balance
An invested capital that cannot be retrieved
All of these
All of these
Sunk costs refer to expenditure that has already been incurred and cannot be recovered regardless of future decisions. Because these costs are non-recoverable and do not change with the outcome of a decision, they should be excluded from future investment analysis or project evaluation.
Sunk costs refer to expenditure that has already been incurred and cannot be recovered regardless of future decisions. Because these costs are non-recoverable and do not change with the outcome of a decision, they should be excluded from future investment analysis or project evaluation.
IncrementalCashFlow=FutureBenefitsтИТFutureCosts
The principle of 'Sunk Cost Fallacy' suggests that decision-makers often incorrectly factor in past spending because they feel a psychological need to 'justify' the previous investment. Rational economic models, such as Net Present Value (NPV) calculation, ignore these costs because they have no impact on the incremental cash flows of a future project.
Sunk costs are retrospective, not prospective.
Decision making should be based on marginal analysis.
Ignoring sunk costs prevents the 'Sunk Cost Fallacy' in engineering projects.
Depreciation and initial R&D spending are common examples of sunk costs.
Ensures rational financial decision-making.
Prevents throwing good money after bad in failing projects.
Psychological difficulty in accepting losses.
Requires disciplined organizational accounting.
Capital budgeting.
Project lifecycle management.
Replacement studies in electrical utility planning.
Sunk costs are sometimes called 'past costs' or 'retrospective costs'.
Option A, B, and C are conceptually synonymous in the context of economic analysis, as they all describe the irreversible nature of funds already spent.
D is correct тАФ All listed items describe the essential attributes of sunk costs, which are expenditures already incurred and irrecoverable by any future course of action.
Always remember that in Engineering Economics, if a cost has already been paid and you cannot get the money back by changing your plan, it is a sunk cost and MUST be ignored in your NPV calculations.