Capital budgeting project: Sunk cost and Economic impact from increased competition

The cash flow projections are flawed since they fail to include costs incurred in the search for projects or the economic consequences of increased competition resulting from highly profitable projects.

Is this comment accurate?

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Answer: No, it's incorrect.

• The capital budgeting process should NOT consider sunk costs (i.e., past costs that do NOT affect the cash flows of the project) such as costs to find investment projects.
• The cash flow projections should consider the economic impact from increased competition resulting from highly profitable investment projects.