Question
In: Economics
Imagine that a business has spent 2 years and $50 millions building a new factory and...
Imagine that a business has spent 2 years and $50 millions building a new factory and it will be completed in 3 more months. They get a report saying that once the factory is completed, it will lose $100,000 per day. Should they finish building the factory and open it? Why or why not?
Solutions
Expert Solution
No, they should not open the factory.
Although the amount already invested in the factory = 50 million, may seem a lot, but it is a sunk cost. It is a cost that has already been made and there is no way to recover it now. Thus, the decision should only depend on whether opening the factory will result in profits from now on. Since the report states that there will be a loss of 100000 per day, there is no point in opening the factory in order to minimize the losses.
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