Sunk Cost and Salvage Value, Special Issues in Replacement Decisions
Replacement decisions use the same for-profit decision analysis technique described in Chapter 10, but two additional factors, sunk cost and salvage value, need to be understood and properly addressed. The sunk cost of an asset is simply the difference between what was paid for it when it was bought and its salvage value—how much it's worth now.
Sunk cost = Acquisition cost – Salvage value
Maybe someone paid $3000 for a laptop computer 3 years ago, and the computer has a salvage value of $700 today. That computer's sunk cost is $2300. Maybe a corporation paid $2.5 million for an inventory control system, but they couldn't sell the system today even if they had to. The sunk cost ...
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