Accounting Dictionary

Sunk Cost

A sunk cost is money that the company has already spent and cannot get back.

ABC Company’s computer system was not working. They spent $5000 on additional training. It still was not working. They have a choice: they can spend $8000 on a new computer package that comes with free training or they can spend $9000 to fix the old system and retrain. Many people would say that they should stay with the old system because they already spent $5000 on it. But that $5000 is irrelevant. No matter which system they choose, they are never going to get that back. It’s gone. It’s a sunk cost. The only question now is whether they want to spend $8000 or $9000 to get the computers up and running.

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