Answer
A sunk cost is a cost that you have already paid and the amount cannot be recovered.
Such costs are irrelevant in making future decisions as the sunk cost does not affect the success of your future decision, or vice versa.
Work Step by Step
Example:
Suppose that your boss in your company has paid some money to a professional designer to design a logo for his company. However, she is not satisfied with the logos made by the designer as they are not up to her expectations. The designer has been paid up and the money cannot be recovered any longer. This money is now called the sunk cost.
Now, here is a twist. Your boss has an intern working for her who you think can also make some good logos for free if given the opportunity. You suggest this to your boss, but she hesitates saying that she has already paid the money to the professional designer. Is she right?
No. Whether she asks the intern to make a logo or not, she is not going to recover the sunk cost. However, if the intern can come up with a better logo, that will solve your boss' problem. So? What's stopping her? She has taken the ' sunk cost' into account which is stopping her from taking a reasonable decision. Hence, sunk cost should be avoided while deciding for future actions.
