What is meant by the term 'sunk cost' in investment decisions?
- A A cost already incurred that cannot be recovered and should be ignored in future decisions
- B A cost that will be incurred in the future
- C The lowest cost option available
- D The opportunity cost of capital
Answer
A cost already incurred that cannot be recovered and should be ignored in future decisions
Only incremental future cash flows are relevant. Allowing sunk costs to influence a decision is the sunk cost fallacy and leads to throwing good money after bad.
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