Which of the following describes sunk costs?

Sunk costs refer to expenses that have already been incurred and cannot be recovered. This concept is essential in financial decision-making, as it emphasizes that past expenditures should not affect future choices. When making decisions about future actions or investments, managers should focus on relevant costs—those that will be affected by a specific decision—rather than on sunk costs, which are in the past and beyond recovery.

Understanding sunk costs helps prevent the "sunk cost fallacy," where individuals continue to invest in a project or endeavor simply because they have already invested time, money, or resources, rather than evaluating the current and future potential of that project. By recognizing that these costs cannot be recuperated, managers can make more informed and rational decisions, focusing instead on potential benefits and costs associated with future actions or projects.