Question

A local restauranteur who had been running a profitable business for many years recently purchased a three-way liquor license. This license gives the owner the legal right to sell, beer, wine, and spirits in her restaurant. The cost of obtaining the three way license was about $90,000 since only 300 such licenses were issued by the state. While the license is transferable, only $75,000 is refundable if the owner chooses not to use the license. After selling alcoholic beverages for one year, the restauranteur came to the realization that she was losing dinner customer and that her profitable restaurant was turning into a noisy, unprofitable bar. Subsequently, she spent about $8,000 placing advertisements in various newspapers and restaurant magazines across the state offering to sell the license for $80,000. After a long wait, she finally received one offer to purchase her license for $77,000.

(a) Was her decision to advertise and ask for $80,000 a good decision, given that she could have decided to not use the license (essentially return the license to the state) and get a refund of $75,000? Please explain.

(b) Should she accept the offer of $77,000 for her license? Please explain.

Answer 1

As per the given information. the purchasing price for the license is $90,000

Refundable price is $75,000

Amount spent on advertising is $8,000

Means the total amount spent by the owner of the restaurant is $90,000+$8,000 = $98,000

a) Had she not advertised about selling the license she would have saved her $8,000 and got refunded for $75,000 while the total amount spent by her would only be $90,000. Her loss would be $15000.

But her decision was to sell it at $80,000 by incurring an additional cost of advertising it at $8,000. Here her loss would be of $18,000 (=90,000+8,000-80,000)

So her decision to advertise and ask for $80,000 was not a good decision. She should've essentially return the license to the state and get a refund of $75,000.

b) Now if she accepts the offer of $77,000, her total loss would be $90,000+ $8,000- $77,000 = $21,000

If she does not accept the offer and still return the license to the state for a refund of $75,000 then her loss would be $90,000+ $8,000 - $75000= $23,000. Here $8,000 is added because she has already incurred the cost of advertising and now she is deciding whether to sell the license or get it refunded.

Therefore, she should accept the offer of $77,000 so that she incurs the minimum loss.