Question

A local restaurateur who had been running a profitable business for many years recently purchased a three-way liquor license. This license gives the owner the legal right to sell beer, wine, and spirits in her restaurant. The cost of obtaining the three-way license was about $90,000, since only 300 such licenses are issued by the state. While the license is transferable, only $75,000 is refundable if the owner chooses not to use the license. After selling alcoholic beverages for about one year, the restaurateur came to the realization that she was losing dinner customers and that her profitable restaurant was turning into a noisy, unprofitable bar. Subsequently, she spent about $8,000 placing advertisements in various newspapers and restaurant magazines across the state offering to sell the license for $80,000. After a long wait, she finally received one offer to purchase her license for $77,000.Was the restaurateur's decision to advertise the license a good decision? Would you recommend that she accept this $77,000 offer?

Answer 1

Answer:

Answer is explained below.

Explanation:

The restaurant owner has spent $90,000 in purchasing the Three-way liquor license. However only $75,000 is refundable if she transfers it. Thus there is already a loss of $15,000 that the restaurant owner will bear Given that she had already spent $8,000 in advertisement which is a sunk cost, her net loss becomes $23.000.

Given the option of $77,000, the restaurant owner considers that ¡f she accepts the offer she would actually be receiving a net amount of $69,000 after deducting $8,000 incurred on advertisement: a total loss of $21,000  

If she decides to wait for further offer and luckily she gets $80,000, then her net loss would be $18,000 $10,000 on license and $8,000 on advertising.

Hence the best altemative is the one with minimum loss. In this case. it is to wait and look for an offer of $80,000. However since she was offered $77,000 after a long wait, it is unlikely that if she declines the offer and wait, she would find the desirous buyer Given the current prospects, she should accept the offer only if the cost of waiting exceeds $3.000, the difference in the net losses.