A local restauranteur owns a profitable restaurant and then decides to purchase

Question

A local restauranteur owns a profitable restaurant and then decides to purchase a liquor license giving her the right to sell beer, wine and spirits for $90,000. While the license is transferable, only $75,000 is refundable if the owner chooses not to use the license at any future time. After selling alcoholic beverages for a year, the owner realizes that she was losing dinner customers and her once profitable restaurant was turning into a noisy, unprofitable bar. Subsequently, she spent $8,000 placing advertisements in various newspapers and restaurant magazines offering to sell the license for $80,000.

What is the local restauranteur’s sunk costs? Explain.

Using only the information above, was her decision to spend $8,000 on advertising to sell the license a wise one? Why?

After a long wait, she finally received an offer to purchase her license for $77,000.

3. Would you recommend that she accept the $77,000 offer? Why?

Explanation / Answer

answer-

1. The local restaurateur's sunk costs are as follows:

Loss while transferring liquor license = $15,000 ( 90000 - 75000)

Advertisement costs = $8000

Hence the total sunk costs stand at $23,000

2. The restaurateur's decision to spend $8,000 on advertisements was definitely not a bad idea since she wanted to desperately sell the license. Had she not given that advertisement, it would have taken even more longer time for her to sell the license.

3. Yes, I would recommend that she accepts the offer for $77,000 since she is already incurring only loss from the current business, iti will be a wise decision for her to sell it for the requested rate. The other reason being, she would be able to get only $75,000 as refundable amount when she transfers the license which is less than the offer. Hence she should accept the offer of $77,000.

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