Which of the following is irrelevant in determining project cash flow for a capital investment? A. Sunk costs B. Tax impacts C. Changes in net working captial D. Opportunity costs
A. Sunk Costs
i go with A. sunk costs are not considered b/c they are already spent. so you evaluate a project based on its merits, not on what you spent in the past.
A. Sunk Cost
i would say A
Answer is A. I dont really know what Sunk cost is, but how is Opportunity cost considered in the cash flow??
Opportunity costs is what u are giving up by taking the project. you consider them as cash outflows. C is not correct because the change in net working capital requires more cash to be put into operations. such can be a case where you have to buy spare parts for a new machine. That is money being spent.
via the discount rate k
Sunk cost is something already spent (for example payment to a market research firm to conduct feasibility study for a new product). Whether you decide to launch the new product or not, the market research firm has to be paid - that is sunk cost for you
So market studies/marketing would be a form of sunk cost?
ancient, first i would say these are operating costs. second, if you evaluate something based on these already incurred costs you could define them as sunk cost. sunk costs are historical cost. something you paid but is not relevant involving future decisions.
sunk costs are simply costs that have already ocurred and are independent of whether the project will be undertaken or not. market studies are one such example as you correctly pointed out, ancientmtk. Say you want to build a new public facility (pool, park, whatever) and want to gauge community interest in the project. You’ll incur the cost of conducting the survey regadless of whether the facility gets built or not.
How do you quantify Opportunity costs?? It’s highly variable and open to interpitation… Id go with D.