What is a sunk cost?

A sunk cost is defined as a cost that has already been incurred and cannot be recovered. This means that the money has already been spent, and regardless of any future actions or decisions, that cost remains fixed. In decision-making, it's important to recognize sunk costs because they should not influence future economic choices. Rational decision-making should focus on potential future costs and benefits rather than past expenditures.

For example, if a company has spent money on a marketing campaign that did not yield the desired results, that expense is a sunk cost. While it's tempting to continue investing in that campaign to "make up" for the loss, decision-makers should instead evaluate future opportunities based solely on their potential value, independent of the money already spent on the ineffective campaign.

The other answer choices refer to costs that are either still relevant to future decisions or not yet incurred, which do not align with the definition of a sunk cost. Recognizing this distinction helps in making better financial decisions that optimize resources and maximize returns.