Question

• Explain the difference between a sunk cost and an opportunity cost and give an example of each.

Answer 1

A sunk cost is a cost that has already been incurred and cannot be recovered. For example, if a firm sinks $400 million on an enterprise software installation, that cost is "sunk" because it was a one-time expense and cannot be recovered once spent

Opportunity costs represent the benefits an individual, investor or business misses out on when choosing one alternative over another. For example, you spend time and money going to a movie, you cannot spend that time at home reading a book, and you can't spend the money on something else.

The biggest difference between them both is that sunk cost is irrelevant in a decision making whereas opportunity cost is considered in decision making as it is a relevant cost.