Discuss in depth how opportunity cost, cannibalization, positive externalities, and sunk costs are instrumental in capital...

Discuss in depth how opportunity cost, cannibalization, positive externalities, and sunk costs are instrumental in capital budgeting decision making.

Expert Solution

Opportunity cost refers to the cost of losing the next best option. The opportunity cost must be taken into consideration in capital budgeting to understand and incorporate the cost of losing the other option.

Cannibalization refers to to the loss of cash flows due to selecting the option under consideration. Since it results in a loss of cash flows because of taking a particular decision it must be taken into account in capital budgeting.

An external it refers to the impact of the project on other things. While cannibalization is a negative externalities that can be positive externalities which impact the cash flows and hence must be taken into account during capital budgeting. For instance a new project may increase the revenues of another project which will increase the cash flows and hence must be considered during analysis.

Sunk cost refers to the cost that has been incurred earlier and which cannot be recovered by undertaking for rejecting the project. Hence this cost is sunk forever and has no impact on the capital budgeting decision.

jeff jeffy answered 8 months ago

Discuss how you understand the following concepts instrumental in capital budgeting decision making: 1.Opportunity cost 2.Cannibalization...

Discuss how you understand the following concepts instrumental in capital budgeting decision making: 1.Opportunity cost 2.Cannibalization 3.Positive externalities 4.Sunk cost. Note, providing just definitions would not satisfy requirements for this discussion. Initial response 250-300 words

Sunk or Opportunity costs. Explain the difference between a sunk cost and an opportunity cost and...

Sunk or Opportunity costs. Explain the difference between a sunk cost and an opportunity cost and give an example of each. please explain in depth.

describe differential cost, avoidable costs, sunk costs, and opportunity costs

WEEK 5: RELEVANT COSTS What is an example of an opportunity cost? How about a sunk...

WEEK 5: RELEVANT COSTS What is an example of an opportunity cost? How about a sunk cost? Are either of these relevant? Avoidable? Examples from work would be great!

Explain why sunk costs should not be included in a capital budgeting analysis but opportunity costs...

Explain why sunk costs should not be included in a capital budgeting analysis but opportunity costs and externalities should be included (1 point). Give an example of each (1 point).

discuss sunk and opportunity costs, why must managers consider these things

Find the best match A. Sunk costs B. Relevant cost C. Opportunity cost Past costs that...

Find the best match A. Sunk costs B. Relevant cost C. Opportunity cost Past costs that are not relevant John is considering buying new machines because last year he spent $4000 on machines that won’t work the $4000 is a John can invest or he can leave his money in the bank and earn $4000 in interest the $4000 is a Fixed cost or $10,000 variable costs are $40 per unit for decision makeing purposes the $40 is the

Why is it that sunk costs are never relevant to a decision whereas opportunity costs are...

Why is it that sunk costs are never relevant to a decision whereas opportunity costs are always relevant? Why do you think Goldratt’s Theory of Constraints received so much press by the business community?

1. Explicit cost equals A) Opportunity cost minus sunk cost.

1. Explicit cost equals A) Opportunity cost minus sunk cost.B) Implicit cost minus sunk cost.C) Economic cost minus opportunity cost.D) Opportunity cost minus implicit cost.2. If supply decreases, and at the same time, demand increases, which of the following would also occur?A) an increase in the equilibrium priceB) a decrease in the equilibrium price of substitutesC) a decrease in the equilibrium quantityD) all of the above3. Which of the following statements about demand elasticity is correct? A) If demand is price-inelastic, an...

How do incremental, opportunity and sunk costs weigh into a make or buy decision? Apply these...

How do incremental, opportunity and sunk costs weigh into a make or buy decision? Apply these concepts to a decision that a company is trying to make.

Question