How is a sunk cost defined?

A sunk cost is defined as a cost that has already been incurred and cannot be recovered. It relates to past expenditures that have no bearing on future decisions because they have already been spent. The concept is crucial in decision-making, particularly in evaluating whether to continue or abandon a project. Since these costs cannot be changed, they should not influence future business decisions or project evaluations.

In contrast, the other options describe different types of costs. A recoverable cost pertains to expenses that could be recouped if a certain action is taken, which is unlike sunk costs. Future costs that can be avoided describe costs that have not yet occurred but can be prevented by making different choices. Projected costs of a new investment refer to expenses expected to be incurred in the future, which again is separate from what defines a sunk cost. Understanding that sunk costs are irretrievable helps in better financial decision-making and avoiding the "sunk cost fallacy," where one continues an endeavor based on previously invested resources rather than current and future data.