Asked by DYLAN HOLLOWAY on Jul 16, 2024
Verified
If a project is being evaluated three years after it had started, how should the costs of the project from the three previous years be considered in deciding whether to continue the project?
A) The costs should be incorporated as cash flows in evaluating whether the project should continue.
B) These costs should not be included in the review of the project because the costs are sunk costs.
C) These costs should be considered to demonstrate how much money the firm has already lost regardless of revenue.
D) The previous costs and revenues should be incorporated into the cash flow stream in evaluating the future of the project.
Sunk Costs
Expenses that have already been incurred and cannot be recovered, and should not affect future decision-making.
Project Evaluation
Project evaluation involves assessing the viability, cost-effectiveness, and potential return on investment of a project through various analytical techniques.
Cash Flows
The total amount of money being transferred into and out of a business, representing the operational, investing, and financing activities.
- Identify sunk costs and their irrelevance to future financial decisions.
Verified Answer
NA
Norma AlmanasirJul 22, 2024
Final Answer :
B
Explanation :
These costs are considered sunk costs because they have already been incurred and cannot be recovered, so they should not influence the decision on whether to continue the project. The decision should be based on future costs and benefits.
Learning Objectives
- Identify sunk costs and their irrelevance to future financial decisions.