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In economics and business decision-making, sunk costs are costs that cannot be recovered once they have been incurred. Sunk costs are sometimes contrasted with variable costs, which are the costs that will change due to the proposed course of action, and prospective costs which are costs that will be incurred if an action is taken. In microeconomic theory, only variable costs are relevant to a decision. Economics proposes that a rational actor does not let sunk costs influence one's decisions, because doing so would not be assessing a decision exclusively on its own merits. The decision-maker may make rational decisions according to their own incentives; these incentives may dictate different decisions than would be dictated by efficiency or profitability, and this is considered an incentive problem distinct from a sunk cost problem. In decision making one should also consider fixed proportion of the sunk costs. Lets take an example of a market which has a free entry. There are several firms in the market operating profitably, but if high proprotions of sunk cost in this market are fixed costs then others firms would hesitate to enter into that market while on the other hand if very low proportion of sunk cost are fixed costs for the same market, firms would love to enter into that market.
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What is the treatment of Sunk costs for Npv calculation?
Exclude sunk costs.
Sunk costs are costs that have proven to be unproductive?
true
What are the stages of accounting for costs?
direct costs,indirect costs,sunk costs, Activity based costing.
Where can one find more information about sunk costs?
Sunk costs are costs that have been expended in an investment or enterprise which cannot be recovered. People often make decisions based on sunk costs. This leads to poor decisions, such as not selling out of a falling situation early enough, or persisting with an expensive but broken software package. A good run down on the problems of sunk costs is available in the Wikipedia article.
Examples of non relevant cost?
Examples are Sunk Costs, Fixed costs and Allocated Costs.
Costs that were incurred in the past which are never incremental costs are called?
sunk cost
Costs that are unaffected by the quantity of product sold are costs.?
Those are Fixed Cost - costs which must be paid for any output level (sunk costs)
Are sunk costs easy to spot and are they simply the fixed costs associated with a decision?
Sunk costs are costs that have been incurred that cannot be reversed. For example, if you owned a car and payed for repairs that were not refundable and were deciding whether or not to purchase a new car, you would not consider the repair costs in your decision because those costs have already been made and you cannot receive the money back. You would only consider the costs that you may incur in the future when making your decision whether or not to purchase another car. Sunk costs are not considered in your decision.
What is the difference between opportunity cost and sunk cost?
sunk costs : These are costs that were incurred in the past. Sunk costs are irrelevant for decisions, because they cannot be changed.Opportunitycost: The profit foregone by selecting one alternative over another. It is the net return that could be realized if a resource were put to its next best use. It is "what we give up" from "the road not taken."
Why does the sunkness or nosunkness of a cost depend on the decision being made?
The sunkness or nosunkness of a cost depends on the decision being made because sunk costs are costs that have already been incurred and cannot be recovered. Therefore, they should not be considered in the decision-making process as they are irrelevant to the future outcome. On the other hand, nonsunk costs are costs that will be incurred if a particular decision is made and should be carefully evaluated before making the decision.
How do sunk costs affect the determination of cash flows?
When evaluating a capital budgeting proposal, sunk costs are ignored. We are interested in only the incremental after-tax cash flows, or free cash flows, to the company as a whole. Regardless of the decision made on the investment at hand, the sunk costs will have already occurred, which means these are not incremental cash flows. Hence, they are irrelevant.
What is the factor in the consideration of whether or not a special order should be accepted?
Sunk Costs
