Use this **Sunk Cost Calculator** to objectively evaluate whether an ongoing project or investment should be continued or terminated, based strictly on future costs and benefits, ignoring past expenditures.
Sunk Cost Decision Calculator
Decision Metric (Net Future Value): $0.00
Recommended Action: Undetermined
Total Project Profit/Loss (if Continued): $0.00
Detailed Steps
Awaiting calculation…
Sunk Cost Decision Formula
The core principle of the Sunk Cost Fallacy is that the decision should only be based on *future* costs and benefits.
Formula Source: Investopedia
Variables
The calculation requires four inputs to fully analyze the project outcome:
- Past Investment (Sunk Cost): Money already spent and unrecoverable. It is vital for total profitability, but *irrelevant* for the future decision.
- Expected Future Revenue/Benefit: The projected income or value to be gained from completing the project.
- Future Cost to Complete: The additional money, time, or resources required to finish the project from this point forward.
- Salvage Value: The value that can be recovered (e.g., by selling assets or using them elsewhere) if the project is terminated immediately.
Related Financial Calculators
Explore these related decision-making tools for financial analysis:
- Net Present Value (NPV) Calculator
- Internal Rate of Return (IRR) Calculator
- Break-Even Point Calculator
- Opportunity Cost Calculator
What is the Sunk Cost Fallacy?
The Sunk Cost Fallacy is a psychological trap where individuals continue an endeavor because of invested resources (time, money, effort) that have already been spent and cannot be recovered (the “sunk cost”). According to rational economic theory, these past costs should not influence the decision to proceed. The choice should be purely forward-looking: if the *future* benefit outweighs the *future* cost, continue; otherwise, terminate.
A classic example is continuing to eat an expensive, but awful, meal just because you paid for it. The money is already spent, regardless of whether you finish the food. The rational decision is to stop eating to avoid further negative utility (discomfort).
How to Calculate Sunk Cost Decision (Example)
Imagine a software development project with the following figures:
- Identify Inputs: Sunk Cost ($50,000), Future Revenue ($70,000), Future Cost ($40,000).
- Calculate Net Future Value (NFV): $70,000 (Revenue) – $40,000 (Cost) = $30,000.
- Determine Action: Since NFV ($30,000) is positive, the rational decision is to **Continue** the project. The $50,000 sunk cost is irrelevant to this forward-looking choice.
- Check Total Profit: Total Profit/Loss = NFV – Sunk Cost. $30,000 – $50,000 = -$20,000. While the project is a total loss, continuing minimizes the loss compared to stopping if the NFV was negative.
Frequently Asked Questions (FAQ)
Is Sunk Cost the same as Opportunity Cost?
No. Sunk cost is money already spent and lost. Opportunity cost is the potential benefit you forgo when choosing one alternative over another. In this calculator, the Salvage Value represents the opportunity cost of continuing the project.
What if the Net Future Value (NFV) is exactly zero?
If NFV is zero, the project is expected to break even on a forward-looking basis. The decision is often based on non-monetary factors like strategic alignment, market reputation, or resource utilization.
Why is the Sunk Cost not included in the decision formula?
The Sunk Cost is excluded because it is a past expenditure that cannot be recovered regardless of the decision (continue or terminate). A rational decision focuses only on the costs and benefits that will occur *after* the decision is made.
Does this calculator work for time and effort, not just money?
Yes. While the inputs are monetary, the Sunk Cost Fallacy applies equally to resources like time, effort, and emotional investment. These non-monetary costs should also be disregarded in the forward-looking analysis.