Sunk Cost

What is a Sunk Cost?

A sunk cost is a cost which a business has already incurred and which cannot be recovered in the future. As these historical costs cannot change, they should not be taken into account when making future decisions.

Suppose for example, a business has already incurred significant costs in research and development for a new product. If it is concluded that the future revenues from the product will not cover the future costs, and the product will be loss making, then the business should ignore the sunk costs and cancel the future development of the product.

The tendency to keep going with future investment due to the substantial sunk costs is referred to as the sunk cost effect.

For further information see the Wikipedia definition.

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Sunk Cost March 23rd, 2016Team

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