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The net present value approach to project termination has been investigated by Bonini 1, Dyl and Long 3, Gaumnitz and Emery 5, Howe and McCabe 7, and Robichek and Van Home 17, 18. While these investigations vary in many aspects, they share the conclusion that sunk costs should be ignored and that projects should be terminated when the expected present value of cash flows, given that the project is terminated oday, is greater than the expected present value of cas flows given that the project is continued for at l ast one additional period. Do managers follow this advice? We suggest that managers tend to become entrapped into losing projects and throw good money after bad as they attempt to rescue them. Termination decisions are difficult even when they are wise. Consider, for example, the report by Russell 19 on the development of an eight-inch floppy disk drive (half-height, double-sided, double density, one megabite capacity) by the Shugart Corporation. The disk-drive project was initially seen as a profitable project by Shugart Corporation, a company that has already established itself as a leader in disk drives. Shugart started the project in 1980, and supported it generously. The project was abandoned in 1983, after severe time and cost overruns and long after disk drives by competitors had been designed into computThe authors wish to thank Melanie Austin, Keith Brown, George Pinches, Robert Taggart, James Van Home and two anonymous reviewers for comments on an earlier draft. Meir Statman acknowledges support from a Batterymarch Fellowship.
Statman et al. (Thu,) studied this question.