![]() Depreciation and book values (notional costs) are not relevantĭepreciation is not a cash flow and is dependent on past purchases and somewhat arbitrary depreciation rates. So, if you were evaluating the viability of a new production facility, then the rent of a building specially leased for the new facility is relevant. ![]() ![]() Note that additional fixed costs caused by a decision are relevant. Irrespective of what treatment is used in the company’s management accounts to split up costs, if the total costs remain the same, there is no cash flow effect caused by the decision. Re-apportionment of existing fixed costs are not relevant A decision on whether or not a new endeavour is started will have no effect on this cash flow, so sunk costs cannot be relevant.įor example, money that has been spent on market research for a new product or planning a new factory is already spent and isn’t coming back to the company, irrespective of whether the product is approved for manufacture or the factory is built.Ĭommitted costs are costs that would be incurred in the future but they cannot be avoided because the company has already committed to them through another decision which has been made.įor example, if a company has two year lease for piece of machinery, that cost will not be relevant to a decision on whether to use that machinery on a new project which will last for the next month. Sunk, or past, costs are monies already spent or money that is already contracted to be spent. Sunk costs (past costs) or committed costs are not relevant ![]() Banks record cash so this test is reliable.
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