Question

Are campaign expenses considered sunk costs?

Are campaign expenses considered sunk costs?

Homework Answers

Answer #1

Yes, campaign expenses are considered sunk costs. Sunk costs are incurred before the project starts and thus cannot be recovered.

Example:

A company has incurred campaign expenses of $10,000

The initial investment is 20,000 and free cash flow in one year is 25,000.

The company generates only $5,000 in addition to the initial investment of $20,000.

If the required rate of return on this project is 10%, the NPV is $2,727.27. So, the company should go ahead with this project even though the campaign expenses is $10,000.

Let me know if you need to understand further.

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