which of the following is correct and why? thanks :) 29. A hospital spent $50 mi

Question

which of the following is correct and why? thanks :)

29. A hospital spent $50 million in labor costs over 5 years attempting to implement a fully integrated electronic records system, but it is not currently completed. The hospital (correctly) believes if it implements the full system it will obtain a $40 million dollar cost savings. Your manager brings you a list of 4 options and asks you to make a single recommendation. Which of the following decisions should you recommend for the hospital, assuming it is only focused on profit and all options are possible? a) Abandon the project b) Sell your application for $20 million. c) Spend an additional $25 million to complete the project. d) Spend an additional $5 million and partially complete the system, resulting in a $30 million cost savings (instead of the originally projected $40 million).

Explanation / Answer

I will choose recommendation d.

Reason

The initial investment of $50 million is sunk cost, so we should ignore it now.

Now, by choosing option d, the profit is $30-5=$25 million

by choosing option c, the profit is $40-25=$15 million

Option b gives $20 million profit and option a no profit, thus option d is the best.

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