Well Known Capital Budgeting Discussion Capital B
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 Galef 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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(I definitely believe that the Sunk Cost Fallacy is applicable outside of just capital budgeting analysis. I think I would see it most in my decision of whether to buy X amount of groceries or eat out. While I know that eating out is expensive, and I do limit it, I still find myself not only eating out, but also buying a bunch of groceries. The amount of groceries I buy doesn’t make sense as to the amount I eat out or go eat at a friend’s house. I complain about the amount I spend eating out, but I am actually losing even more from buying more groceries because I end up throwing most of them out. If I would have just gone with the amount of groceries that I know I will eat, rather than investing in more groceries than I know I will end up eating, I would have been better off financially in the end. I would be better off to buy less groceries initially. I can always go back and purchase more if needed rather than taking the loss all at once over and over again.)