Sunk Cost - International Finance and Banking

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There is also another simple example of sunk cost in business. Let’s stick to the story of you as producers of software. You start to produce a new software and spend $50 000. But in the middle of producing, you found out that new software would have zero value because it is not relevant in the market and that it will only cost you $35 000 to make the newest software. Again, there are two options. One is to continue with the production of the first software, and second one is the abandonment of first project and start of the second project. Rational decision would be second one, because cost of first project is sunk and cannot be replaced. No matter what you do, construction of irrelevant software would just harm your company in every sense. But when starting to do second project, you have an opportunity to earn money. There is a difference. Decision – makers are making mistakes because they have wrong incentives and attribute attention to how project is seen. For example, it is worse when you have lost all of your money and produce nothing in difference with producing something, even though it is not necessary. [7]This is why most of them continue with the first project.

SOURCES:

Wikipedia,. 'Sunk Costs'. N.p., 2015. Web. 10 Dec. 2015.

F. Brigham, Eugene, and Joel F. Houston. Fundamentals Of Financial Management. 12th ed. Masson, OH: South-Western Cengage Learning, 2009. Print

Study.com,. 'Sunk Costs: Definition & Examples - Video & Lesson Transcript | Study.Com'. N.p., 2015. Web. 10 Dec. 2015

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