Regarding capital budgeting, is the research and survey cost here a sunk cost that is unrelated to the project’s initial outlay? Or is it a relevant cost that should be added to the initial outlay?

One response

1. In capital budgeting, a sunk cost refers to a cost that has already been incurred and cannot be recovered. When evaluating a new project, sunk costs should generally not be considered in the decision-making process because they are unrelated to the future cash flows generated by the project.

   On the other hand, research and survey costs that are not yet incurred when making the capital budgeting decision can be considered relevant costs if they are necessary for the project’s successful implementation. If these costs provide valuable information that would influence the decision to go forward with the project, they should be included in the initial outlay.

   In the context of your question, if the research and survey costs have already been incurred, they would be classified as sunk costs and should not be included in the initial outlay. However, if they are projected costs that you need to spend to assess the feasibility or profitability of the project, they should be included as relevant costs in the initial investment calculation.

   Thus, whether these costs are sunk or relevant depends on their timing and context in relation to the project’s cash flows.

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