What does the term "sunk cost" refer to?

The term "sunk cost" refers specifically to a cost that has already been incurred and cannot be recovered, making the chosen answer the most accurate definition. This concept is crucial in decision-making processes as it helps businesses understand which costs should influence current decisions. Since sunk costs cannot be altered by any future actions, rational decision-making often suggests that they should not impact future business choices. For example, if a company spent money on a marketing campaign that did not produce results, that expenditure is a sunk cost. When evaluating a new marketing strategy, the company should focus on potential future costs and benefits rather than the money already spent, as those funds are irretrievable regardless of the next steps taken. Thus, recognizing and ignoring sunk costs aids in making economically sound decisions without being influenced by past expenditures.