Sunk Cost are costs that have already been incurred, cannot be recouped and therefore are not relevant when making Capital Budgeting decision.
ABC Corporation is evaluating the net present value (NPV) of a new product line. ABC Corporation spent $50,000 a year ago on market research for this product line. Should ABC Corporation factor in the market research costs when determining the Net Present Value (NPV) of the project? The answer is no! The costs has already occurred and cannot be recouped. The focus needs to be on the change in future Cash Flow s if the company accepts or rejects this project.
In financial aspects and business choice making, a sunk expense is a review (past) cost that has as of now been caused and can't be recuperated. Sunk expenses are off and on again appeared differently in relation to prospective expenses, which are future expenses that may be caused or changed if a move is made. Both review and prospective expenses may be either settled (consistent the length of the business is in operation and unaffected by yield volume) or variable (subject to volume) costs. Then again, numerous economists think of it as a mix-up to group sunk expenses as "settled" or "variable." for instance, if a firm sinks $1 million on an endeavor programming establishment that cost is "sunk" on the grounds that it was an one-time cost and can't be recuperated once used. A "settled" expense would be regularly scheduled installments made as a feature of an administration contract or authorizing manage the organization that set up the product. The forthright hopeless installment for the establishment ought not be considered a "settled" cost, with its cost Spread out after some time. Sunk expenses ought to be kept separate. The "variable expenses" for this venture may incorporate server farm power utilization, and so on.
In conventional microeconomic hypothesis, just prospective (future) expenses are significant to a speculation choice. Customary financial aspects recommends that monetary performers ought not let sunk expenses impact their choices