Question

When performing capital budgeting, __________ incurred by a project are irrelevant to future investment decisions.

Answer 1

Question:

When performing capital budgeting, __________ incurred by a project are irrelevant to future investment decisions.

A) Opportunity costs

B) Depreciation

C) Sunk costs

D) Taxes

Answer:

The correct answer is C) Sunk Costs      

Explanation:

Capital Budgeting is the art (most applicable to corporate persons) of planning expenditure that will be incurred in the future, especially on long term assets.

The reason you cannot factor Sunk Cost into a Capital Budget is because of  its very nature.

Sunk Costs refer to monies for items that have already been expended and can never be recovered. If it can never be recovered and has already  been incurred, it has no role to play in future considerations especially when the purpose of Capital Budgetting is considered.

The primary purpose of a Capital Budget is that it helps to further evaluate the inflow against the outflow of an investment to check whether or not the return is acceptable.

Every other option given in the question above are items that have futuristic qualities.

Cheers

Answer 2

The sunk cost should not be relevant to future investment decisions.

The following information should be considered:

• Sunk Costs refer to the cost that have already been expended and can never be recovered.
• If it can never be recovered and has already  been incurred, it has no role to play in future considerations especially when the purpose of Capital Budgetting is considered.

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