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Are sunk costs, opportunity costs and externalities relevant for evaluating projects?

When evaluating potential projects, which of the following factors should be incorporated as part of a project's estimated cash flow?

A) Any sunk costs that were incurred in the past prior to considering the proposed project.
B) Any opportunity costs that are incurred if the project is undertaken.
C) Any externalities (both positive and negative) that are incurred if the project is undertaken.
D) Statements B and C are correct
E) All statements above are correct.

Solution Preview

Choice B is correct.

a. Any sunk costs that were incurred in the past prior to considering the proposed project.

Incorrect. For example, you spent $10,000 on a new truck for your roofing business last year, which depreciates 10% a year (or $1000 next year). You find out that you can use the truck for a project that will make you $800 next year. If you considered the cost of the truck, you wouldn't accept the project since it would have a NPV ...

Solution Summary

This solution explains in 258 words why each of the three options are either correct or incorrect, with examples for better understanding.

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