Sunk Cost Dilemma
Categories: Accounting
See: Sunk Cost.
Yes, it's a dilemma when you've spent $100 million on oil rigs in that newly formed country somewhere south of Russia. But guess what: the government you thought was in power...isn't in power anymore. And the new regime is green-only. They don't do oil. Even though they have massive reserves, they won't drill. Their national mascot: the polar bear.
So you're out of luck. That $100 million you put in the ground is now gone, gone, gonezo. You can try to rescue it, sell it for scrap on eBay, or just let it go, write it off, and move on; it's a sunk cost. Those costs are...sunk. Like most of the polar bears.
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Finance: What are sunk costs?2 Views
Finance allah shmoop What are sunk costs Mother sunk there
gone There been no money back guarantee kind of costs
Gold diggers No different kind of gold digger Real ones
heading to a far off land in a politically unstable
country Where this week you happen to believe that american
relationships with whatever stand will be Oh just great forever
You spend fifty million bucks shipping tractors trucks granola bars
anti diarrheal medicine hard hats and twenty thousand of those
little pan thing is that you you know paying for
golden You know those All right Well you just start
digging and well there's a coup and the prime minister
of whatever stand is overthrown by rebels and you have
to leave or die What to do what to do
what to do Well so yep That's Fifty billion bucks
sunk Gone No money back Cia Fifty mil Those dollars
sunk But some costs aren't just about costs that were
you know gone and never to be gotten back They
also relate to project started where you can't get your
initial outlay back Like when a large corporation are twelve
Newly minted mba is for their corporate finance department And
nine get fired within the first two years Could you
have saved a million box and just hired the three
Good ones instead No why Because you never know who
the good ones will be in advance until they've been
you know tested on the field of financial battle the
nine fails or a sunk cost of the business You
can also think about typical sunk costs as revolving around
the decision whether you should continue to produce a product
like when you're managing a company you really need to
ignore sunk costs For example think about our little lemonade
stand prototype Here we use the best granite and reclaimed
wood and we're selling lemonade for a buck a glass
and are variable costs or in fifteen cents give or
take We spent a million dollars on a lemonade stand
Is that million dollars considered when we decide whether or
not we gotta work tomorrow We'll know it's a sunk
cost or nothing we can do about it It doesn't
affect whether we go to work tomorrow or not side
in fact pair so sunk costs are costs which big
boys and big girls know are never recoup a ble
there indem it parts of doing business as capital is
risked on ventures that may or may not have positive
Payback But hopefully your payback is better than the payback 00:02:26.313 --> [endTime] because this guy got