What is sunk cost?

We call sunk costs to those costs that have been incurred and cannot be recovered in the future. The costes The best known of this type are time, since time is one of the variables that cannot be recovered. On the other hand, money and other resources that are spent on a project, in a inversión or another activity that has the characteristic described above may also be denoted as sunk cost and, therefore, cannot be recovered.

It is recommended that this cost is not taken into account if economic investment decisions are to be made, as it represents more of a future advantage than an evaluation of what has been spent in the past. This concept is related to opportunity cost for that very reason.

In other words, when we have sunk costs, we are assuming that we are going to choose an option over different alternatives. The situation raised makes us lean towards one of the options, assuming that the decision we make will have consequences for the future, without the need to look back as it will affect future situations.

Example of sunk costs in a company

Let's imagine that a company raises a project, in which a new innovative product is presented. The market study to cover this product costs € 2, and the product design and modeling costs € 000. Subsequently, your services marketing they amount to € 3. Along with this, we will have to add the elapsed and past time, the investigation and the proposed model, which amount to 000 months.

Given this situation, we must bear in mind that the expenses that have been made, both in time, research and economic investment (€ 10 in total) are sunk costs, since they cannot be recovered, regardless of the decision that is made.

An important point to comment on is that we must not only trust whether the investment is good or bad only taking into account its evaluation, because the money spent will not influence that evaluation.

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