Archive of Definitions Articles

Sunk cost is an expression representing the unrecoverable amount of money that has already been placed into an ongoing investment or project. It is one of the simplest, yet most commonly misused financial measurements of a project. We’ll learn how to avoid the most common mistake in project (financial) management, and how to survive when our boss makes the mistake.

We’ve talked previously about using ROI to determine which projects to fund. This isn’t the only way to make those decisions, as Ski points out with the concept of flush. Payback period is the measure of how quickly an investment returns the invested amount, or the break-even point in the investment.

Net present value, or NPV is the great equalizer of financial analysis.

NPV allows us to compare any two investments and determine which is the better investment.

NPV tells us how many dollars, today, we would be willing to spend to receive money in the future. NPV lets us compare investments that pay back money in very different ways - we can decide if we would rather have $10,000 in one year, or $500 per month for 20 months. Without NPV, the two investments appear to be the same (they both return $10,000), but one of them is better than the other.

Why won’t my boss approve my project? I’ve done the math - it’s a good investment. Because it isn’t good enough. We learn the math and rationale behind these decisions in this article.

Understanding the expected value of a possible future event allows us to make mathematically sound decisions. We can decide if we want to make an investment. We can assign a reasonable price for our services. We can prioritize requirements. Expected value is a calculation that should be used when calculating ROI.

We talk about ROI all the time - what is it, in layman’s terms?
ROI is the acronym for return on investment. Another way to think of it is “How much profit will we make if we invest in this project?” Profit is revenue minus costs. Technically, the question should be “How much [...]