You have been made treasurer for a day at AIMCO, Inc. AIMCO develops technology for video conferencing. A manager of the satellite division has asked you to authorize a capital expenditure in the amount of $10,000. The manager states that this expenditure is necessary to continue a long-running project designed to use satellites to allow video conferencing anywhere on the planet. The manager admits that the satellite concept has been surpassed by recent technological advances in telephony, but he feels that AIMCO should continue the project. His reasoning is based on the fact that $2.5 million has already been spent over the past 15 years on this project. Although the project has little chance to be viable, the manager believes it would be a shame to waste the money and time already spent. Use marginal cost–benefit analysis to make your decision regarding whether you should authorize the $10,000 expenditure to continue the project.
In this case, the $2.5 million dollar investment is a sunk cost spent over the past 15 years. It should not enter into the decision making now. To make your decision, you need to weigh the benefit and cost of authorizing the $10,000 against the benefit you will receive if you make authorize the cost now. Since the technology has been surpassed, it would not bring or realize any benefit now, so the expenditure should not be authorized.
My answer: