Question

What is a sunk cost? Why is a sunk cost ignored in capital budgeting?

Answer 1

A sunk cost for a project is the one that will be incurred even if the project is not accepted. This can be advocate fee to know the market condition or a market survey before launching a new campaign.

As this sunk cost is incurrend in the case the project is selected as well as in the case it is accepted, we will ignore it. The expense of the sunk cost is incurred even before making an acceptance or rejection decision about the project. Hence, as the sunk cost is not affected by the decision to accept/reject the capital budgeting project, we ignore it.

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