Eco561 Sunk Cost

Sunk Costs

ECO/561

July 17, 2013

Professor Alan Gorlick

Sunk costs are cost associated with the initial purchase or investment of an item, software, personnel, etc... and cannot be recouped at any point in the process. Since sunk costs cannot be recouped, it should not have any effect on the final end state of the item. However, some business analysts tend to erroneously include/consider when planning a project. In the following report, we will demonstrate the sunk costs for two projects.

In 1995 the Department of Defense (DoD) was given the challenge of developing a new travel system (Gore, 1997). DoD was expected to develop a system that would reduce the almost $400 million dollar a year administration costs for its current paper travel system (XXX,2000). Enter the Defense Travel System (DTS).

DTS was meant to be a fully automated travel system that would carry the traveler from the beginning of the process to the final step, payment. DoD expected the system to be fully operational roughly 5 years after they started the development and the total investment cost to be a little less than $424 million (XXXX, oooo). Unfortunately, things didn’t pan out as DoD had planned.

DTS development at the 5 year mark had already exceeded the initial planned budget, starting to break the bank at over a half billion dollars. Additionally, it was clearly not ready for full rollout as the department was still experiencing several issues. It was at this point at the department needed to make a decision: do we keep it or do we can it? Some senior officials felt like we had to see it through so development and implementation carried on.

It is not clear if the initial investment (sunk cost) was a factor in the final decision or not. If fact, some uncertainty remained for several years to come. In the 2007 National Defense Authorization Act (DTMO, XXX) a study was directed to determine the best way to meet DoD travel needs. As a result of the study, in early 2008,...