What are sunk costs?

Sunk costs are defined as costs that have already been incurred and cannot be recovered. This means that once the expense has been paid, it is irrelevant to future decision-making because it does not change regardless of future outcomes. When evaluating options for future investments or projects, it is important to disregard sunk costs; these costs should not influence current or future decisions because they cannot be affected by any actions taken moving forward.

Understanding sunk costs is crucial in managerial decision-making, as relying on them can lead to poor choices, such as continuing a failing project simply because significant resources have already been invested. Instead, decision-making should focus on prospective costs and benefits, which are relevant to future actions. Other options describe different financial concepts that do not pertain to the definition of sunk costs.