What is a sunk cost?
Wednesday, October 20, 2010 at 5:48AM A sunk cost is a cost that an entity has incurred, and which it can no longer recover by any means.
Sunk cost should not be considered when making the decision to continue investing in an ongoing project, since you cannot recover the cost. However, many managers continue investing in projects because of the sheer size of the amounts already invested in the past. They do not want to "lose the investment" by curtailing a project that is proving to not be profitable, so they continue pouring more cash into it. Rationally, they should consider earlier investments to be sunk costs, and therefore exclude them from consideration when deciding whether to continue with further investments.
For example, ABC Company spends $50,000 on a marketing study to see if its new auburn widget will succeed in the marketplace. The study concludes that the widget will not be profitable. At this point, the $50,000 is a sunk cost. ABC should not continue with further investments in the widget project, despite its earlier investment.
Similar Terms
A sunk cost is also known as a stranded cost.
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