Future

In economic decision contexts it is important to recognise that what happened in the past cannot be changed and is irrelevant to a rational economic analysis. Current economic decisions must seek the best outcome from the current alternatives available. The historic cost of an asset, or a written down financial accounting 'book value' might be useful to evaluate past decisions, and past cost information may be very useful in predicting future costs, but past costs in themselves are irrelevant for current decisions. Such past costs are often termed 'sunk costs' and are always irrelevant. However, past costs, and their implications for evaluation of past decisions may have an impact on the behaviour of those responsible for poor past decisions. Managers may prefer occasionally to 'throw good money after bad' rather than admit to past mistakes!

Cash Flows

In the first half of the course you should have gained an appreciation of the differences in amount and timing between cash flows and profit. Economic decision analysis relies on a knowledge of the amounts and timings of cash flows. These cannot normally be approximated by, or equated to profit measures. The amounts and timing of revenues flowing in, and cost expenditures flowing out in the future as a consequence of the decision are therefore relevant.

Differ Between Alternatives

In relation to an economic decision, any factor that will be the same whichever decision alternative is selected provides superfluous information that is irrelevant and can be excluded from the analysis.