Sunk cost in NPV

[Chi_Mai]

I’m not sure when costs are recognised to be sunk.

For example, the problem says " Last year the company produced a prototype at a cost of €500,000. Now management is having doubts about the market appeal of the product in its current design, and so they are considering delaying the start of the project for a year, until the prototype can be shown to industry experts."

And in the answers, it says that 500,000 EUR must not be considered in NPV analysis because it is sunk cost. But why isn’t it initial outlay? The Company produced something and will earn revenues and incur costs, right? How the company would do it without that investment? Why the **** is it sunk?

[S2000magician]

@Chi_Mai

I’m not sure when costs are recognised to be sunk.

For example, the problem says " Last year the company produced a prototype at a cost of €500,000. Now management is having doubts about the market appeal of the product in its current design, and so they are considering delaying the start of the project for a year, until the prototype can be shown to industry experts."

And in the answers, it says that 500,000 EUR must not be considered in NPV analysis because it is sunk cost. But why isn’t it initial outlay? The Company produced something and will earn revenues and incur costs, right? How the company would do it without that investment? Why th**** is it sunk?

Because that money is spent whether they decide to start today, or start next year, or to scrap the idea altogether.