Capital budgeting analysis should only include those cash flows which will be affected by the decision. Sunk

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Capital budgeting analysis should only include those cash flows which will be affected by the decision. Sunk costs are unrecoverable and cannot be changed, so they have no bearing on the capital budgeting decision. Opportunity costs represent the cash flows the firm gives up by investing in this project rather than its next best alternative, and externalities are the cash flows (both positive and negative) to other projects that result from the firm taking on this project. These cash flows occur only because the firm took on the capital budgeting project; therefore, they must be included in the analysis.

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Financial Management Theory And Practice

ISBN: 9780324259681

11th Edition

Authors: Eugene F Brigham, Michael C Ehrhardt

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