What should be done with sunk costs in a TCO analysis?

In the context of Total Cost of Ownership (TCO) analysis, sunk costs refer to expenditures that have already been incurred and cannot be recovered. The rationale behind ignoring sunk costs in a TCO analysis is that decisions should be based on future costs and benefits rather than past investments. Including sunk costs could lead to biased decision-making, where one might irrationally weigh these costs when evaluating potential future investments or changes.

Focusing on relevant costs, which are those that will change as a result of the decisions made, is critical for effective financial analysis and strategic planning. By ignoring sunk costs, decision-makers concentrate on the costs that will affect future outcomes, allowing for more rational and economically sound choices. This principle stems from economic theory, which holds that past costs should not affect current decision-making.