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.
