Scandinavian Working Papers in Economics

SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

No 68: What Fraction of a Capital Investment is Sunk Cost?

Marcus Asplund
Additional contact information
Marcus Asplund: Dept. of Economics, Stockholm School of Economics, Postal: P.O. Box 6501, 113 83 Stockholm, Sweden

Abstract: In order to determine to what extent capital investments are sunk costs this study deals with salvage values of discarded metalworking machinery. Even though these assets are expected to be non-specific many of the discarded assets are scrapped rather than sold on second-hand markets. Econometric results suggests that firms can only expect to get back 20-50 percent of the initial price for a "new" machine once it is installed. The results also show differences in value-age profiles across firms, but give only weak support for the hypothesis that salvage values are particularly low in recessions.

Keywords: Sunk cost; second-hand market; salvage value; machine tools

JEL-codes: C24; D24

27 pages, First version: September 1995. Revised: September 24, 1999.

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