Investopedia defines sunk cost as
A cost that has already been incurred and thus cannot be recovered. A sunk cost differs from other, future costs that a business may face, such as inventory costs or R&D expenses, because it has already happened. Sunks costs are independent of any event that may occur in the future.
When making business or investment decisions, individuals and organizations typically look at the future costs that they may incur, by following a certain strategy. A company that has spent $5 million building a factory that is not yet complete, has to consider the $5 million sunk, since it cannot get the money back. It must decide whether continuing construction to complete the project will help the company regain the sunk cost, or whether it should walk away from the incomplete project.
In other words: is it worth it to keep throwing money at a project if the project cannot recover that cost?
That’s the dilemma that UTOPIA’s management is facing. After a legislative audit last week came back with less than stellar results, questions are swirling about whether cities should keep throwing “good money after bad,” or if they should just pull the plug and cut loses.
But the biggest question about UTOPIA isn’t operational. It’s whether its business model can ever turn a profit. So far, that hasn’t happened. The audit suggests that providing broadband infrastructure at wholesale to independent content providers may never work, but it stops short of drawing a final conclusion. It does say that the question may be answered in places like Centerville, where the agency is making a new push to market itself.
But if the plan doesn’t work there, and the business continues to show a negative cash flow, then what happens? (The system lost $18.8 million in 2011.) Should the sponsoring cities pull the plug by refusing to underwrite any more debt?
The cities haven’t done that so far because they know that a fire sale of the system’s assets would bring only pennies on the dollar, and cities still would be left with bond payments on the existing debt. So they keep nursing UTOPIA along in the hope that its high-speed broadband service eventually will catch fire in the market.[...]
The original 11 cities include Tremonton, Perry, Brigham City, Layton, Centerville, West Valley City, Murray, Midvale, Lindon, Orem and Payson. Together, they will pay nearly $13 million next year to service the agency’s bonds. With the reduction in sales-tax revenues due to the slow economy, some cities have begun to raise property taxes to keep their municipal services whole while making UTOPIA payments.
Any economist will tell you that sunk cost is just that: sunk. If you can’t recover the cost, the economical thing to do is cut your losses and move on. Maybe it’s time for UTOPIA to do the same.