Question
Shelley is deciding whether to start a winery. She must leave her job as a consultant from which she would earn $80,000 as a full-time
Shelley is deciding whether to start a winery. She must leave her job as a consultant from which she would earn $80,000 as a full-time employee. It costs her $100,000 to install watering equipment and plant vines. She pays for one-half of this amount from her savings, and borrows one-half. If she was to cease her business, then the watering equipment and vines would have no resale value. She must also pay $20,000 per year for water. Shelley can invest at a rate of 5% per annum and borrow at a rate of 10% per annum. At the time Shelley is deciding whether to start the business she plans to operate it for one year and then cease the business. (i) What is her opportunity cost of operating the business for that year? (ii) When making the final decision to start the winery or not, apart from opportunity cost, what else must she take into consideration?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started