Sunk Costs Definition
A sunk cost is a cost that has already been incurred and cannot be reversed. A sunk cost is often Irrecoverable, meaning it cannot be recovered through any means. Sunk costs are different from future costs, which are costs that have not yet been incurred but will need to be paid in the future. For example, if you buy a new car, the purchase price is a sunk cost, whereas the future costs of gasoline and maintenance are future costs.
Sunk costs can play an important role in decision-making. For example, imagine you’re considering whether to go to a movie or stay home and watch TV. The ticket price for the movie is a sunk cost; you paid it when you bought your ticket and there’s no getting it back. Whether or not you see the movie is unrelated to the ticket price (it’s already been paid). The only relevant question is whether seeing the movie is worth more than staying home and watching TV. In other words, would you rather see the movie or have an equivalent amount of money?
The same principle applies when making business decisions. For example, imagine your company is considering whether to invest in a new factory. The decision shouldn’t be based on how much has already been spent on the project (sunk costs), but rather on whether investing additional resources will generate more revenue than investing them elsewhere.
In summary, sunk costs are expenses that have already been incurred and cannot be reversed. They
