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)
The NPV start date updated to 1 January 2014 (excludes the sunk capital expenditure of $121 million spent 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.
They argue that, when consumers are unsure of production costs, sunk capital expenditures such as advertising signal the magnitude of a firms' price premium, thereby assuring buyers that the price is high enough to induce high quality.
Thus, with the addition of adverse selection, the Klein-Leffler model indeed provides a justification for sunk capital spending and the dissipation of at least some of the positive profit from the quality-assuring price.
In contrast, this article assumes an explicit history of noncooperative choices and that these choices leave a certain amount of sunk capital that parties bring to the bargaining table.
Sunk capital that is left over from initial noncooperative choices might include sunk capital employed in a production activity that generates a transboundary pollutant, specialized fishing gear and knowledge appropriate to a particular open-ocean fishery, specialized technologies to mine deep-sea beds, and an immobile system of dams and canals to withdraw water from an international river system.
Sunk capital owned by private investors, many of them foreign, was often regarded as an attractive target for expropriation under populist governments in the post-World War II period.
Indeed, sunk capital investments and high operating costs (not to mention future decommissioning and waste disposal problems) have made atomic power by far the most expensive source of mass-generated electricity.