Sunk Cost

On July 12, 2020 a fire broke out aboard the USS Bonhomme Richard while docked in San Diego. The fire burned for five days and caused immense damage to the vessel. At the time of the fire, the 22 year old ship was undergoing a $250 million upgrade that would allow it to accommodate more modern aircraft, among other things. The fire burned so hot that it caused the steel in the deck and hull to warp. At the time of the fire, Rear Admiral Philip Sobeck stated, “We are absolutely going to make sure it sail again,” and the Navy awarded an additional $10 million to the contract of the company that was making the modifications.

However, in November 2020, after assessing the damage and cost of repairs, the Navy decided to scrap the vessel instead. In their assessment, it would take 5 to 7 years to complete the repairs and cost $3 billion, much more that the $761 million it cost to build in the 1990’s (even after adjusting for inflation). They also explored the possibility of repurposing the vessel for other use, but determined that would also cost in excess of $1 billion. In the end, the Navy will spend an estimated $30 million to salvage the vessel for spare parts to be used on other ships.

Discussion

1. Explain the role of marginal costs and sunk costs in the process of making the decision to scrap the USS Bonhomme Richard. What is the “sunk cost fallacy”?
2. Explain the similarity to this situation to the decision of whether to repair your current vehicle or purchase a new one. What might be a good decision-making rule for when to buy a new car? What other constraints might affect that decision?
3. What are some other items you use in your daily life that are often less expensive to replace than they are to repair? What factors might be leading to repair costs exceeding production costs?

Sources: Forbes: What Happens If The U.S. Navy Can’t Fix The Fire-Damaged Assault Ship ‘Bonhomme Richard’?, NBC News: Navy will scrap assault ship damaged by massive fire, New York Times: Navy Won’t Repair Fire-Damaged Warship, Saying It Would Cost Billions, The Drive: Navy Will Spend Around $30 Million To Scrap Fire-Damaged USS Bonhomme Richard, Photo: Ingalls Shipbuilding, Pascagoula, Mississippi (USA) – U.S. Navy photo NH 107664-KN – Official U.S. Navy Photograph, from the collections of the U.S. Naval History and Heritage Command