finance iii

It is a well known capital budgeting rule that when estimating a projects cash flows that any previous expenditures known as sunk costs should not be considered. For example if you hire a consulting firm to conduct market research and analysis to determine the demand for a new product prior to conducting a capital budgeting analysis you would not consider the cost associated with hiring the consulting firm in your capital budget analysis as this cost will occur regardless of whether you accept of reject the project. This is known as the Sunk Cost Fallacy. View the following video on the Sunk Cost Fallacy by Julia GalefLinks to an external site. and its relation to other aspects of life. Do you believe that the Sunk Cost Fallacy is applicable outside of capital budgeting analysis? What are other areas of life, whether schooling, family, career, hobbies, etc… where the Sunk Cost Fallacy might be useful?

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