i try to understand the concept of sunk cost and how we compute sunk costs when there is a difference between book and market value.

For example, if the book value of assets is $300 000 and the market value of the assets is $150 000.

Sunk costs = ($300 000 - $150 000 (depreciation)) = $150 000 ? Or the sunk costs = 300 000 because the assets have been already paid ?

Many thanks,

  • 2
    $\begingroup$ If part of the assets can be sold for money then that part is implicitly not sunk. $\endgroup$ – Henry Feb 23 at 16:26

Sunk cost "is a cost that has already been incurred and cannot be recovered." For example, paying people to dig a hole in the ground. If you can sell the asset then the money you get can't be part of the sunk cost because that portion of the cost was recoverable.


Sunk Cost Definition


A sunk cost is a cost that an entity has incurred, and which it can no longer recover.

Sunk or Stranded Cost


3rd Paragraph under the above link:

True stranded costs are the fair market value of a firm’s assets minus their historical, depreciated book value. If the book value is greater than the fair market value, then the firm has stranded costs. If the fair market value is greater than book value, then the firm has no stranded costs.

In the context of the article the firm level stranded costs are the same as sunk costs except the costs are called "stranded" when the cause of the change in market value is driven by changes in public regulations.

Context of Question

Market value of firm assets minus depreciated book value equals sunk cost:

150,000 - 300,000 = -150,000

One could also state the sunk cost as a positive value however it represents a loss that cannot be recovered compared to the depreciated book value of assets.


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