Opportunity, Sunk Costs and Investment Decisions

Topic 

Opportunity, Sunk Costs and Investment Decisions

Instructions 

1. Explain the effects of sunk costs and opportunity costs in deciding whether to accept a project.
2. Review the financial considerations a company should make before investing in a project.
3. Understand how net working capital, depreciation and interest influence the decision to buy or not to buy.
4. Explain how inflation and interest rates affect the capital budgeting process.

Answer Preview 

There is distinct difference between sunk costs and opportunity. Sunk costs are costs which have already being incurred hence there is no need of them being reflected in the incremental cash flows when estimating net present value and internal rate of return. As their name suggests, they cannot be recovered once incurred. On the other hand, opportunity costs are costs that do not incur cash flows because they are the best foregone alternatives. They represent lost opportunity due to lack of adequate funds.

Word Count: 200