what is Sunk cost ? should it be considered whether to continue with troubled project?

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ajaynit
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what is Sunk cost ? should it be considered whether to continue with troubled project?

Postby ajaynit Thu Dec 14, 2017 6:28 am

what is sunk cost?

lets say initial budget of a project is 100 euro
mid way project its realized already project has spent 200 euro means 100 euros over budget at midway only..

now one need to decide whether to continue with this project or not.. in this decision making should we consider the fact that its already 100 euros overbudget?
suresi00
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Re: what is Sunk cost ? should it be considered whether to continue with troubled project?

Postby suresi00 Thu Dec 14, 2017 9:26 am

Sunk cost is defined as something you already lost. You cannot recover it back. I hope this example will help you.

Let’s say a company spent $5 million building an airplane. Before the plane is complete, the managers learn that it is obsolete and no airline will buy it. The market has evolved and now the airlines want a different type of plane.

The company can finish the obsolete plane for another $1 million, or it can start over and build the new type of plane for $3 million. What should the managers decide? Should they spend that last $1 million to finish up the plane that’s almost done, or should they spend the $3 million to build the new plane?

At first glance, you may think the company should just finish the old plane. It’s only another million bucks and they already spent $5 million. But in reality, the five million is irrelevant. It is a sunk cost. The only relevant cost is the $3 million dollars. The managers should consider whether or not to spend $3 million on the new plane, and nothing regarding the old plane should affect the decision.
ajaynit
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Re: what is Sunk cost ? should it be considered whether to continue with troubled project?

Postby ajaynit Thu Dec 14, 2017 9:34 am

thanks sures,example makes it clear.

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