You have opened your own word processing service. You have already bought a special computer needed for word processing and paid $5,000 for it. However, due to the cost changes in the computer industry, the current price of an equivalent machine is $2,500. You could sell any used machine for 200 dollars – and no machine can be used for more than one year. If you were not word processing, you could earn $20,000 per year at an alternative job. Assume that the interest rate is 10%.

You can also hire an assistant who can do everything that you would do for $20,000 per year, and you would still continue to do word processing. One person using one computer can produce 11,000 typed pages per year, and the price per page for your service is $2.

Calculate the following three options:

You are considering three options: (1) leave your business the way it is, (2) expand your business by hiring an assistant, or (3) shut down all operations.

Based on the costs and revenues above, which should you do? Explain and show any relevant calculations.

1st option

great

To determine which option is the most profitable, we will calculate the costs and revenues associated with each option.

1) Option 1: Leave the business as it is.
- Revenue: The revenue generated from word processing is the price per page multiplied by the number of pages produced per year. In this case, the revenue is $2 per page multiplied by 11,000 pages, which equals $22,000.
- Cost: The cost includes the opportunity cost of not working at an alternative job. The opportunity cost is the income you would have earned if you were not word processing. In this case, the cost is $20,000.
- Net profit: The net profit is the revenue minus the cost. So, $22,000 - $20,000 = $2,000.

2) Option 2: Expand the business by hiring an assistant.
- Revenue: The revenue remains the same as in option 1, $22,000.
- Cost: The cost includes the salary of the assistant, which is $20,000.
- Net profit: The net profit is the revenue minus the cost. So, $22,000 - $20,000 = $2,000.

3) Option 3: Shut down all operations.
- Revenue: There is no revenue as the business is shut down.
- Cost: The cost includes the opportunity cost of not working at an alternative job, which is $20,000.
- Net profit: The net profit is negative in this case since there is no revenue. So, $0 - $20,000 = -$20,000.

Now let's compare the net profits of each option:

Option 1: $2,000
Option 2: $2,000
Option 3: -$20,000

Based on the calculations, it is clear that option 1 and option 2 have the same net profit of $2,000, while option 3 has a net profit of -$20,000. Therefore, the best option would be either option 1 or option 2, as they both result in positive net profits.

However, if we take into account the initial investment of $5,000 for the computer, we need to consider the opportunity cost of using that money elsewhere. If the computer is not used for word processing, it can be sold for $200. Therefore, the net cost of the computer is $5,000 - $200 = $4,800.

Considering the net cost of the computer in option 1:
Net profit in option 1 = $2,000 - $4,800 (net cost of the computer) = -$2,800

Considering the net cost of the computer in option 2:
Net profit in option 2 = $2,000 - $4,800 (net cost of the computer) = -$2,800

Based on these calculations, both option 1 and option 2 result in negative net profits when considering the net cost of the computer. Therefore, the best option would be to choose option 3, which is to shut down all operations, as it results in the least negative net profit.