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Making a Business Decision: Expand, Leave or Shut Down

Question: You have opened your own word-processing service. You bought a personal computer, and paid $5, 000 for it. However, due to the cost changes in the computer industry, the current price of an equivalent machine is $2,500. You could sell any used machine for $1,000. If you were not word processing, you could earn $20,000 per year at an alternative job. Assume that the interest rate is 10%. You can also hire an assistant who can do everything that you can do for $20,000 per year (you would still continue to do word processing). One person using one computer can produce 11,000 typed per year, and the price per page for your service is $2.00

You are considering three options:
(1) Expand your business by hiring an assistant
(2) Leave your business the way it is
(3) Shut down

Based on the costs and revenues above, which should you do? Explain and show relevant calculations.

Solution Preview

Based on the information given above, the best possible alternative will be to expand the business by hiring an assistant. The choice is based on the following calculations:

First of all, we will calculate the opportunity cost if I do not expand this business and take up an alternative job by closing down the business. The opportunity cost will be:

Salary: $20,000 per year
Interest earned on $1000 (Received from sale of used computer)= $100
Interest earned on $2500 (which will need to be spent on acquiring ...

Solution Summary

Based on the information given above, all three possible decisions are analyzed to solve for which choice is best. This is all completed in about 330 words and includes all required calculations.

$2.19