Q. What is the relevance of Sunk Costs in Project Investment Decisions?
A. The When making business decisions, each option you face has associated future costs and associated future revenues. Typically, you will compare the future revenues to the future costs, and adjust for the timing of the cash flows and for the risks involved. This provides a comparison of the likely profitability of each option.
Sunk costs are money that you've already spent on one of the options, before making the decision. Regardless of which option you choose, the money has already been spent.
Let's say you have two innovation projects. Project 1 has invested $100K so far. Project 2 has invested only $10K so far. Rationally, we must select whichever project has the best future return for the company. The money spent in the past is irrelevant, because you can't get that money back. If project 2 has better future returns, but you choose to proceed with project 1, you are essentially "throwing
good money after bad".
[Source - Internet]
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