Bruce Moneybags owns several restaurants and hotels near a local interstate. One

Question

Bruce Moneybags owns several restaurants and hotels near a local interstate. One restaurant, beef and more, needs modernized. Bruce is trying to decide whether to accept an offer and sell beef and more as if for the offer price of 1.1 million or renovate the restaurant himself. The projected renovation cost is 1.3 million. The restaurant would need to be shut down completely during the renovation which would cause a net operating cash flow loss of 210,000 in today's dollars. The estimated present value of the cash inflows from the renovated restaurant are 3.2 million. When analyzing the renovation project, what opportunity cost, if any should be included for the current restaurant? Assume the restaurant is totally paid for and any future costs will be paid in cash.

A. There is no oppurtunity cost.
B. The opportunity cost is the value of the current offer to buy the restaurant.
C. The oppurtunity cost is the cost of the needed improvements.
D. The oppurunity cost is the present value of the loss of operating cash flows while the restauraunt is closed for renovation.
E. The oppurtunity cost is the cost of the renovations plus the loss of the operating cash flows during the renovation.

Thanks!

Explanation / Answer

Bruce Moneybags owns several restaurants and hotels near a local interstate. One restaurant, beef and more, needs modernized. Bruce is trying to decide whether to accept an offer and sell beef and more as if for the offer price of 1.1 million or renovate the restaurant himself. The projected renovation cost is 1.3 million. The restaurant would need to be shut down completely during the renovation which would cause a net operating cash flow loss of 210,000 in today's dollars. The estimated present value of the cash inflows from the renovated restaurant are 3.2 million. When analyzing the renovation project, what opportunity cost, if any should be included for the current restaurant? Assume the restaurant is totally paid for and any future costs will be paid in cash.

A. There is no oppurtunity cost.
B. The opportunity cost is the value of the current offer to buy the restaurant.
C. The oppurtunity cost is the cost of the needed improvements.
D. The oppurunity cost is the present value of the loss of operating cash flows while the restauraunt is closed for renovation.
E. The oppurtunity cost is the cost of the renovations plus the loss of the operating cash flows during the renovation.

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