if a firm has already paid an expense or is obligated to pay one in the future, regardless of whether a particular project is undertaken, that expense is a
In economics and business decision-making, a sunk cost is a cost that has already been incurred and cannot be recovered. Sunk costs (also known as retrospective costs) are sometimes contrasted with prospective costs, which are future costs that may be incurred or changed if an action is taken.
What is an example of a sunk cost?
Once the company’s money is spent, that money is considered a sunk cost. Regardless of what money is spent on, sunk costs are dollars already spent and permanently lost. Sunk costs cannot be refunded or recovered. For example, once rent is paid, that dollar amount is no longer recoverable – it is ‘sunk.’
Are fixed costs and sunk costs the same?
However, not all fixed costs are considered to be sunk. The defining characteristic of sunk costs is that they cannot be recovered. It’s easy to imagine a scenario where fixed costs are not sunk; for example, equipment might be resold or returned at purchase price. Individuals and businesses both incur sunk costs.