The Outsider's Viewpoint: Addressing Sunk Cost and Salvage Value
The outsider's viewpoint is a simple but effective way to be sure the sunk cost and the opportunity cost of the salvage value are properly addressed in the decision analysis. The outsider's viewpoint assumes that you are someone who needs the service provided by either the existing asset or the proposed replacement(s) but you don't own either. As an outsider, you have the choice of either buying the existing asset at its salvage value or buying (any one of) the replacement candidate(s).
Because the outsider only pays the salvage value to buy the existing asset, its original acquisition cost is ignored, exactly as it should be. Whatever was originally paid for the asset is not a ...
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