What is Sunk Cost?
A sunk cost is a cost that has already been incurred and cannot be recovered. Sunk costs are different from incremental costs, which are costs that will be incurred as a result of a particular decision.
In business, sunk costs are often relevant when deciding whether to continue investing in a project or abandon it. The decision to continue investing should be based on the expected future returns from the project, rather than on the costs that have already been incurred. This is because sunk costs cannot be recovered, regardless of whether the project is continued or abandoned.
For example, if a company has invested $100,000 in a project that is not producing the expected results, the decision to continue investing in the project should be based on the expected future returns from the project, rather than on the fact that the company has already invested $100,000. If the expected future returns are not sufficient to justify the investment, the company may decide to abandon the project, even though the $100,000 investment has already been sunk.