Sunk Cost

What is a Sunk Cost?

A Sunk Cost refers to money that has already been spent and cannot be recovered. These costs should not be considered when making future business decisions, as they remain unchanged regardless of the outcome of those decisions. The focus should only be on prospective costs and revenues.

Short Description: A cost that has already been incurred and cannot be recovered.

• Irrecoverable: Once incurred, these costs cannot be recovered, regardless of future actions or decisions.
• Decision-Making: Should not influence future financial decisions as they remain constant.
• Examples: Money spent on research and development that cannot be retrieved even if the project is abandoned.

Understanding sunk costs is crucial to making informed decisions and preventing previous expenses from biasing future business strategies.