Sunk costs are costs that cannot be recovered. They represent money lost when items are replaced or projects are abandoned. Calculating sunk costs provides a true estimate of what it will cost to upgrade equipment or walk away from a project.
Calculate Sunk Costs for Equipment
Record the make, model and serial number of the equipment to be replaced.
Look up the new price of each object based on its make, model and serial number.
Find the realizable salvage value of each object. This is based on its actual condition and factors like wear and tear. This may be available through an industry blue book for equipment value estimation.
Subtract the present realizable salvage value from the book value. The result is the sunk cost.
Calculate Sunk Costs for a Project
Identify all equipment that can be salvaged from the project. This can include tools and equipment that can be sold or reused.
Calculate the sunk costs for equipment that can be salvaged.
Calculate the cost of equipment that cannot be salvaged. This is the purchase price of the equipment minus depreciation or usage.
Total the cost of labor put into the project to-date.
Add the cost of labor (which cannot be recovered), the cost of equipment that cannot be salvaged and the equipment sunk cost. The total is the sunk cost for the project.
Salvageable value may require an appraisal by a professional.
Sunk costs also include management time, support and maintenance costs, and other intangible investments. However, these calculations for sunk costs only take into consideration physical equipment and tracked labor costs.
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