sunk costs

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Sunk costs

Costs that have been incurred and cannot be reversed.

Sunk Costs

Money that has already been spent. Sunk costs are important because a company may use, for example, an old piece of equipment to make a new product. In this case, sunk costs are positive because no further investment is required. On the other hand, a sunk cost may be negative; for example, that old piece of equipment may break down after its warranty has expired. This means that the owner will not recover the costs no matter what happens.

sunk costs

any expenditure on durable and specific FACTOR INPUTS, such as plant and machinery, that cannot be used for other purposes or easily be resold. Such sunk costs have no affect on MARGINAL COSTS and do not influence short-term output decisions.

The presence of sunk costs through investment in TRANSACTION-specific assets can affect the relative bargaining power of parties to a CONTRACT. See ASSET SPECIFICITY. See also OPPORTUNITY COST, BARRIERS TO EXIT.

References in periodicals archive ?
After-tax net present value (NPV) of US$755million; 100% increase from DFS (excluding sunk capital expenditure of US$121 million incurred on the SXEW development to date)
People in the industry think it should be built on Heathrow because there is so much sunk capital and connectivity already there," he said.
Navy's Pacific Fleet based at Pearl Harbor, Hawaii, and just three days later sank the British battleship Prince of Wales and the battle cruiser Repulse--the first time in history aircraft had sunk capital ships underway.
Over the next 50 years central power plant equipment representing trillions of dollars of sunk capital will be replaced by distributed generation systems such as fuel cells, wind turbines, microturbines, Stirling engines and solar cells.