Sunk Costs.

A sunk cost is money already spent as a result of a past decision. Sunk costs should be disregarded in our engineering economic analysis because current decisions cannot change the past. For example, dollars spent last year to purchase new production machinery is money that is sunk: the money allocated to purchase the production machinery has already been spent-there is nothing that can be done now to change that action.

As engineering economists we deal with present and future opportunities.

Many times it is difficult not to be influenced by sunk costs. Consider 100 shares of stock in XYZ, Inc., purchased for $15 per share last year. The share price has steadily declined over the past 12months to a price of $10 per share today. Current decisions must focus on the $10 per share that could be attained today (as well as future price potential), not the $15 per share that was paid last year.The $15 per share paid last year is a sunk cost and has no influence on present opportunities.

As anotherexample,whenReginawas a sophomore, shepurchased a newest-generation laptop from the college bookstore for $2000. By the time she graduated, the most anyone would pay her for the computer was $400 because the newest models were faster, cheaper and had more capabilities. For Regina the original purchase price was a sunk cost that has no influence on her present opportunity to sell the laptop at its current market value ($400).


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