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Capital Investment Decisions: Sunk costs and timing options

Q12-4
Explain why sunk costs should not be included in a capital budgeting analysis, but opportunity costs and externalities should be included.

Q13-2
What factors should a company consider when it decides whether to invest in a project today or to wait until more information becomes available?

Q13-3
In general, do timing options make it more or less likely that a project will be accepted today? Explain.

Solution Preview

Q12-4
Explain why sunk costs should not be included in a capital budgeting analysis, but opportunity costs and externalities should be included.

The rule for including a cost in capital budgeting analysis is that whether there will be any change in that cost depending upon my final decision to invest or not to invest. Thus costs which are affected by the decision only included in capital budgeting analysis.

Now sunk costs are costs which are incurred in past and are unrecoverable. Whatever is our decision about the project, we cannot affect sunk cost, and thus these costs are not included in ...

Solution Summary

Explains in 415 words three short answer type questions on sunk cost and timing options of the projects. Explained in simple terms for easy understanding.

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