Description
When calculating Net Present Value (NPV) you do not include costs that have already been incurred. These prior expenses are known as “sunk costs.” For many, the concept of sunk cost is difficult to understand because, of course, you did spend the money and those expenses were real. However, for NPV, one is considering a very narrow question: “What is the present value of this investment that I’m about to make?” Sunk costs are in the past - the salaries you paid your team, the materials you’ve purchased and used, and the value is captured in the data you now have on hand. There is nothing you can do to get back those funds (short of selling off company assets). So, you don’t include sunk costs when calculating NPV. This short video walks you through a couple of simple examples that show how this principle can be helpful when managing a product development program. Please take the IRI TRACK workshop on Financial Analysis for Product Development to learn more.
Contributors
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Spencer Pugh, PhD
Dr. Spencer Pugh is an executive with 35 years of experience in technology development, product commercialization, and business management. He is the Principal of Prospect Ridge Consulting, LLC, and serves on the Board of Directors of the start-up MagPlasma. Most recently, he was Vice-President, Research and Development, for Michelman, a specialty chemical company headquartered in Cincinnati, Ohio. His global R&D team developed coatings and additives for printing, packaging, and composite applications. From 2005 to 2015, Dr. Pugh was with Battelle in Columbus, Ohio, where he was the Vice-President and General Manager of the Energy and Environment Global Business Unit. With offices and laboratories in the US and the UK, his 300+ person team delivered R&D results in oil and gas exploration and production; alternative energy systems; electric grid management; environmental assessment, monitoring and remediation; environmental chemical analysis; and agrochemical formulation and evaluation. Before coming to Battelle, Dr. Pugh was a Senior Laboratory Head in Research and Development with Eastman Kodak in Rochester, New York. His team developed new products for enhanced performance, improved manufacturability, and reduced cost for Kodak’s manufacturing plants in China, France, and the U.S. He holds a B.S. in Chemistry and Physics from The College of William and Mary and a Ph.D. in Physical Chemistry from Stanford University. Dr. Pugh is also a Six Sigma Black Belt and a Certified Licensing Professional (CLP), licensed by the Licensing Executives Society. He has been active in the Innovation Research Interchange (IRI) for 15 years and has served on its Board of Directors twice.
Spencer is a technical executive with over 30 years of experience in innovation management. He is the Principal of Prospect Ridge Consulting, LLC, and serves on the Board of Directors of the start-up MagPlasma. Most recently, he was Vice-President, Research and Development, for Michelman, a specialty chemical company headquartered in Cincinnati, Ohio. Prior to that, Spencer was the Vice-President and General Manager of the Energy and Environment Global Business Unit of Battelle, the research and development non-profit headquartered in Columbus, Ohio. He started his professional career with the Eastman Kodak Company in Rochester NY, where Spencer was a Senior Laboratory Head. He holds a Ph.D. in Physical Chemistry from Stanford University. He is a Six Sigma Black Belt and is also a Certified Licensing Professional (CLP), licensed by the Licensing Executives Society (LES). He has been active in the Innovation Research Interchange (IRI) for 15 years and has served on its Board of Directors twice.