Sunk Cost Vocabulary

Understanding Sunk Costs

  • A sunk cost represents an expenditure of money or time that has already been incurred.
  • The critical factor of a sunk cost is that it is non-recoverable, meaning it cannot be retrieved once it has been spent.

Sunk Costs in Business Investment Scenarios

  • Sunk costs are a common factor in major business investment decisions, particularly during the creation of new market offerings.
  • Example of a Corporate Sunk Cost:
    • A company initiates a project to develop a new product, spending a total of $5 million\$5 \text{ million} during the development process.
    • Following this expenditure, the company learns through market research or feedback that customers do not want the product.
    • The $5 million\$5 \text{ million} serves as a definitive example of a sunk cost because the money has already been spent and the company cannot get it back, regardless of the product's lack of success or the company's future actions.