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Capital budgeting sunk costs dispose assets impact cash flow

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Incremental cash flows when deciding whether to invest in a new manufacturing plant
1.Statement - Money already spent on engineering design of the new plant.
Question - Past expenses are considered sunk cost and should not be a consideration for incremental cash flow, but what if we had to alter the design, would you count that part even though it was originally done in the past? Why or why not?
2. Statement - The market value of the site and existing buildings would be cash flows.
Question - How would that fall under cash flows specifically?

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Solution Summary

Capital budgeting sunk costs which dispose assets impact cash flows are examined. The discussion is 350 words and two references.

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1. Sunk costs are generally ignored in capital budgets such as when deciding whether to invest in a new plant. The reason is that it cannot be changed and does not differ between alternatives. That does not mean that the dollar amount is NEVER useful, as historical cost does impact the gain or loss on sale of the old item, influencing taxes and therefore tax payments (cash flow). And the historical costs does influence the depreciation ...

Solution provided by:
Carol Sargent, PhD
Education
  • BSc, University of Virginia
  • MSc, University of Virginia
  • PhD, Georgia State University
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