Question

What is sunk cost?

Hint:

Remember the phrase: "Don't cry over spilt milk." A sunk cost is like spilt milk—it's gone, and you can't get it back, so your future decisions should not be based on it.

Answer 1

A sunk cost is a cost that has already been incurred and cannot be recovered. It is a past, irreversible expenditure.
The most important characteristic of a sunk cost is that it is irrelevant to future decision-making. Since the money has already been spent and cannot be retrieved, it should not influence any decision about future actions. Rational decision-making should only consider future costs and future benefits (i.e., relevant costs).
Examples of Sunk Costs:
A company spends \$1 million on research and development (R and D) for a new product. If the product is later found to be unviable, the \$1 million is a sunk cost. The decision of whether to invest more money in the project should not be influenced by the fact that \$1 million has already been spent.
A student pays a non-refundable \$500 registration fee for a course. If the student later decides the course is not useful, the \$500 is a sunk cost. The decision to continue the course should be based on the future benefits and costs, not the already-spent fee.
Money spent on marketing a product that ultimately fails to sell.
Ignoring sunk costs is a key principle of rational economic decision-making, helping to avoid the "sunk cost fallacy" (also known as "throwing good money after bad"), where one continues a venture because of past investments, rather than a rational assessment of future prospects.