BGH\'s sleep center has been open for about six years and has failed to make a p
ID: 2656651 • Letter: B
Question
BGH's sleep center has been open for about six years and has failed to make a profit every year. The clinic has lost an average of $50,000 annually and there was an initial investment of $1 million. The CEO has asked you to model the value keeping the sleep center open vs. closing it. You financial model should include which set of costs?
a) 6 years of operating loss totaling $300,000 (6 x $50,000)
b) 6 years of operating loss totaling $300,000 (6 x $50,000) + $1 million startup costs
c) $50,000 annual loss
d) $50,000 annual loss plus $1 million startup costs.
Explanation / Answer
Initial investment of $1 million is already incurred 6 years before - Thus it is sunk cost and not relevant for future decision making.
This will rule out Option b & Option d
Similarly, annual loss of $ 50000 which was already incurred for last 6 years, is cant be relelavnt for future years as that was also sunk cost
thus correct option is
c) $50,000 annual loss
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