Sunk Cost

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What is a 'Sunk Cost'

A sunk cost is 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. Are all fixed costs considered sunk costs?

    Find out why all sunk costs are considered fixed, but not all fixed costs are considered sunk; see why variable costs become ... Read Answer >>
  2. How do sunk costs create a barrier to entry for new firms?

    Learn about sunk costs, what these costs are and how the size of sunk costs can create barriers of entry to a market for ... Read Answer >>
  3. Why should sunk costs be ignored in future decision making?

    Learn about sunk costs, why sunk costs should be ignored in the decision-making process and why future costs should be considered ... Read Answer >>
  4. How can you avoid the sunk cost trap?

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  5. What is the difference between a sunk cost and an opportunity cost?

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