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CMA Foundation · Fundamentals of Business Economics and Management · Decision-making - Types and Process

The directors of a Chennai engineering company keep investing in a loss-making plant, citing the Rs 8 crore already spent, even though fresh projections show future cash inflows will be lower than the additional cost needed. Which decision-making barrier is mainly at work?

The main barrier is escalation of commitment driven by sunk cost. The directors continue investing because of money already spent, although new projections show future inflows are below the extra cost. Sunk costs are irrelevant to future decisions and should be ignored.

  1. AEscalation of commitment driven by sunk costCorrect
  2. BLack of a clear objective
  3. COver-reliance on quantitative data
  4. DDelegation of authority

Explanation

Past spending of Rs 8 crore is a sunk cost and should not influence a forward-looking decision. Continuing because of it is escalation of commitment. The case does not show unclear objectives or over-reliance on numbers; indeed fresh projections are being ignored.

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