What are sunk costs

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Cost, sunken

Sunk costs (also: sunk costs, irreversible costs) are costs that were caused by a decision made in the past and that can no longer be changed today in terms of their existence and amount. It is therefore no longer possible to avoid or reduce costs through current or future decisions.

Since they can no longer be influenced, sunk costs are costs that must not be included in the decision-making process for current or future decisions (e.g. investment decisions).

Example of sunk costs: The community of Musterhausen has made an investment decision (e.g. bridge over a stream in the community). The planned volume of the investment is 5 million euros. After a few years it turns out that the 5 million euros (of which 4 million euros have already been spent) were clearly underestimated. In fact, the investment project, including the 4 million euros already spent, will cost a total of 15 million euros. The community is now faced with the choice of either canceling the project or pursuing it further. The project termination is assumed to cost 1 million euros. In this decision, the already incurred costs of 4 million euros must not be taken into account, as they represent sunk costs. The decision alternatives are therefore:
  1. Abort the investment project, accept additional costs of 1 million euros and ultimately not be able to use the bridge.
  2. Completing the investment project at a cost of 11 million euros and being able to use the bridge after completion.