A local restaurateur who had been running a profitable business for many years r

Question

A local restaurateur 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 license was $75,000, since only 300 such licenses are issued by the state. While the license is transferable, only $65,000 is refundable if the owner chooses not to use the license. After selling alcoholic beverages for about one year, the restaurateur came to the realization that she was losing dinner customers and that her profitable restaurant was turning into a noisy, unprofitable bar. Subsequently, she spent $6,000 placing advertisements in various newspapers and restaurant magazines across the state offering to sell the license for $70,000. After a long wait, she finally received one offer to purchase the license for $66,000. Would you recommend she accept the offer, why?

Explanation / Answer

I would recommend she except the offer because it is more than the transferable refund of 65,000. We can see that advertisements cost 6,000 however these costs are sunk costs and cannot be considered since we cannot get them back anyway. Hope this helps

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