What Fraction of a Capital Investment is Sunk Costs?

Abstract

To what extent are capital investments sunk costs? This question is addressed by examining the salvage values of discarded metalworking machinery. Even though such assets are expected to be non‐specific, many discarded assets are scrapped rather than sold on second‐hand markets. Econometric results suggest that firms can only expect to get back 20–50 percent of the initial price of a ‘new’ machine once it is installed. The results also indicate differences in value‐age profiles across firms, but provide only weak support for the hypothesis that salvage values are particularly low during recessions.

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