Answer to Question #41694 in Finance for tri

Question

"ABC copmpany owns a 10 year lease to a building in the centre of HCMC which it currently pays $200,000 rent each year"

Project A: US corp leases the building from ABC.

Is 200,000 a sunk cost if this company is to adopt project A?

Answer 1

In economics and business decision-making, a sunk cost is a retrospective (past) cost that has already been incurred and cannot be recovered. Sunk costs are sometimes contrasted with prospective costs, which are future costs that may be incurred or changed if an action is taken. Both retrospective and prospective costs may be either fixed (continuous for as long as the business is in operation and unaffected by output volume) or variable (dependent on volume) costs. Sherman notes, however, that many economists consider it a mistake to classify sunk costs as "fixed" or "variable." For example, if a firm sinks $1 million on an enterprise software installation, that cost is "sunk" because it was a one-time expense and cannot be recovered once spent. A "fixed" cost would be monthly payments made as part of a service contract or licensing deal with the company that set up the software. The upfront irretrievable payment for the installation should not be deemed a "fixed" cost, with its cost spread out over time. Sunk costs should be kept separate. The "variable costs" for this project might include data centre power usage, etc.
So, if this company is to adopt project A, 200,000 is a sunk cost.