Business decision-making, sunk costs are retrospective (past) costs. They have already been incurred and are not redeemable. Sunk costs are unrecoverable past expenditures. Generally, you would not contemplate when determining whether to continue a project or abandon it, because they cannot be recovered either way. Although it is a common practice to count them as in the case your firm purchases a new software; and the installation fee is $10,000. That $10k is the cost of doing business, once you make the investment for the software, the installation fee is gone, no matter the usage or outcome of its’ use.
Your company purchased a machine several years ago. Due to recent technology advances, the products produced by the machine cannot be sold to customers. Your machine is now obsolete. The price originally paid to purchase the machine cannot be recovered by any action. There is nothing that you can do to change your purchase or the fact that your machine is useless therefore a sunk cost.
These costs should not be taken into account or weighed heavily while making any decision because no action can reverse them.
What sunk costs have you incurred lately? Have you ever purchased a new car? If so, you know exactly what I’m talking about. Once you make the purchase the car value is decreased. When you are ready to sell it, the car would not be sold at the purchase price – the difference my friend, is the sunk cost!