when analyzing a project, sunk costs ____ incremental cash outflows.
when analyzing a project, sunk costs ____ incremental cash outflows.
Answer : When analyzing a project, sunk costs should be ignored when considering incremental cash outflows. Sunk costs refer to the costs that have already been incurred and cannot be recovered, regardless of whether the project is pursued or not. These costs are irrelevant for decision-making because they are not avoidable or incremental to the project.
Incremental cash outflows, on the other hand, are the additional cash expenditures that will be incurred as a result of undertaking the project compared to the alternative course of action. These costs should be considered in project analysis as they represent the cash flows directly attributable to the project and influence the decision-making process.
By disregarding sunk costs and focusing on incremental cash outflows, decision-makers can make more rational and objective assessments of the costs and benefits associated with a project. This approach helps to avoid the potential bias of considering past costs that are no longer relevant to the decision at hand.