Question

7.[10 points] Fran is considering permanently closing down her beauty salon. A consultant advises her that if she stays open for business, she will have operating revenues of $300,000 and operating costs of $280,000. In addition, Fran has paid $40,000 for fixtures that can be resold for $15,000 after she closes the beauty salon. a. What is the value of Fran's beauty salon if it remains open? b. What is the value of Fran's beauty salon if she closes it? c. Explain whether Fran should close down the beauty salon.

Answer 1

solution : (a) the value of Pran's beauty salon if it remains open- sunk cost $ 40,000 - $15,000 $ 25000 future operating revenue = $ 300,000 future operating cost = $ 180,000 therefore, the value of fran's beauty salon If it remains open - future (operating Revenue - operating costs - sunk Cast = $300,000 - $280,000 - $25,000 .$- 5,000. (b) value of Poan's beauty salon of the closes t = value of future operating Cost - future evenue operating revenue Sunk cost = $280,000-$300,000 - $25,000 --445000 (c) Fran should remain open and the value of remaing open ů more than value of closing it. 202077/30 00:01

fran should remain open with his beauty salon as by shutting it she has to bear more cost.