5. A local restaurant initially estimated a large demand for dining in a space n

Question

5. A local restaurant initially estimated a large demand for dining in a space near a floor-to-ceiling fish tank. The cost of the tank is $8 million. (Assume that such a tank has no resale value.) The owner moved ahead with the project and the tank is three-fourths done (i.e., $6 of the $8 has been spent). However, the owner is having second thoughts about how substantial the demand for such a dining experience is. The local paper quotes him as saying: " . . .given that the tank is three-fourths complete, it makes sense to go ahead with completion and opening the restaurant.”

(a) Does this statement reflect the appropriate decision-making criteria?

(b) What is the appropriate criteria?

Explanation / Answer

Yes. This statement reflects an appropriate decision making criteria.

The appropriate criteria is not wasting the already spent $6 million on the tank. The demand is always an estimate and the cost is real. Hence it was better that the project was completed.

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