Wednesday, March 26, 2014

Anglo American and Sunk Costs

Anglo American has stopped its investment in a gold mine in Alaska after spending over $500 million.  This is an example of a sunk cost.  Since Anglo American cannot recoup the money it has already spent (i.e. the sunk cost) and does not expect that continuing to invest will make a great enough return, then even after spending over half a billion dollars on this mining venture - it is economically rational for a firm to stop its investment.

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