Learning outcome: After attempting this activity, students will be able to understand the concept of “Sunk Cost”.
Internationally, governments spend vast amount of money on government projects in various sectors including health, infrastructure, education, community and even on defense. Although, such projects are well planned with specific objective, however, some of these projects are abandoned well before completion. Consequently, it creates substantial “sunk costs” for the government. For instance, in Orange country, Metro Train project of 1,000 Km was idealized for Rs. 2 billion in 2010 however it was halted only after 400 Km of the road was constructed. In Apple country, government purchased electronic voting machines for Rs. 1 billion in 2018, however these machines were disposed of in 2020 only after being used once in the elections. Additionally, the mentioned cost did not include the storage cost.
Sunk cost is the cost expended in the past that cannot be retrieved on product or service. For example the entity purchase stationary in bulk last month. This expense has been incurred and hence will not be relevant to the management decisions to be taken subsequent to the purchase.The cost of Rs 2 billion and 1 billion mentioned is considered as sunk cost because it cannot be used to get any benefit in monetary terms that is it cannot be recovered