Sunk cost, opportunity cost and relevant cash flow
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Iridium Corp. has spent $3.5 billion over the past decade developing a satellite based telecommunication system. It is currently trying to decide whether to spend an additional $350 million on the project. The firm expects that this outlay will finish the project and will generate cash flow of $15 million per year over the next 5 years. A competitor has offered $450 million for the satellites already in orbit. Classify the firm's outlays as sunk costs or opportunity costs, and specify the relevant cash flows.
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Solution Summary
This discusses the concepts such as Sunk cost, opportunity cost and relevant cash flow
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Relevant cost
An item is relevant if it is different between or among decision alternatives. That item is not relevant if it is the same between or among decision alternatives.
Here are some follow-up generalizations. As with all generalizations, there will always be exceptions.
1. In general, sunk costs are not relevant because they cannot be avoided in a decision. They have already been incurred ...
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