Sunk Cost

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DEFINITION of 'Sunk Cost'

A cost that has already been incurred and thus cannot be recovered. A sunk cost differs from other, future costs that a business may face, such as inventory costs or R&D expenses, because it has already happened. Sunk costs are independent of any event that may occur in the future.

BREAKING DOWN 'Sunk Cost'

When making business or investment decisions, individuals and organizations typically look at the future costs that they may incur, by following a certain strategy. A company that has spent $5 million building a factory that is not yet complete, has to consider the $5 million sunk, since it cannot get the money back. It must decide whether continuing construction to complete the project will help the company regain the sunk cost, or whether it should walk away from the incomplete project.

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RELATED FAQS
  1. Why should sunk costs be ignored in future decision making?

    A sunk cost is a cost that cannot be recovered or changed and is independent of any future costs a business may incur. Since ... Read Full Answer >>
  2. How can you avoid the sunk cost trap?

    Avoid the sunk cost trap by recognizing that any investment you've made into a project or decision to date should not be ... Read Full Answer >>
  3. How do sunk costs create a barrier to entry for new firms?

    A sunk cost represents the investment a firm puts at risk when entering a market. This cost cannot be retrieved. The size ... Read Full Answer >>
  4. What is the difference between a sunk cost and an opportunity cost?

    The difference between a sunk cost and an opportunity cost is the difference between money already spent and potential returns ... Read Full Answer >>
  5. What is the difference between capital investment decision and current asset decision?

    Capital investment decisions are long-term funding decisions that involve capital assets, while current asset decisions are ... Read Full Answer >>
  6. What's the difference between microeconomics and macroeconomics?

    Microeconomics is generally the study of individuals and business decisions, macroeconomics looks at higher up country and ... Read Full Answer >>
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