Explore BrainMass

Explore BrainMass

    Sunk Costs and Externalities

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    Why is a sunk cost excluded (I think they are sunk because the manager is in the process of sinking the company) while opportunity cost (opportunity for what?) is included?

    Moreover, why is externality cost (external to my office, my company, or my comprehension) included in financial analyses?

    © BrainMass Inc. brainmass.com June 3, 2020, 11:57 pm ad1c9bdddf

    Solution Preview

    Sunk cost is excluded from analysis because these are costs that have already been incurred. There is nothing that the manager can do to recoup these costs back. Thus, going forward sunk costs should be excluded from analysis as they do not impact the cash flow in the future. For example, if for a project you have already spend $1M in marketing expenses, then those are sunk costs that you ...

    Solution Summary

    The solution goes into a great amount of detail regarding the question being asked. Step by step explanation is provided for each part of the question which makes it very easy to follow along for anyone with just a basic understanding of the concepts. Overall, an excellent response to the question being asked.