I need help with the following:
Let's pretend the market for beer in Singapore is for all intents and purposes a monopoly. Tiger Beer (Asia Pacific Breweries technically) has an overwhelming market share. The demand for Tiger Beer in Singapore for each year is given by:
???? = 250 − 5????.
Tiger Beer has a single plant that it built for 100 million dollars in 2010. Each year it has a loan repayment of 6 million to pay off the loan it took out to finance the plant. The plant itself is fairly specialized and has zero scrap value, but it has some equipment that is worth 10 million if the plant is closed and sold off. Each year Tiger Beer enters into a bulk electricity and water contracts for which they pay 2 million upfront for all the electricity and water they want. Their marginal cost, which is mostly labor, maintenance and ingredients (Barley, Hops and Yeast) is 2 per unit.
a.) Before the beginning of each production year, what parts of the firm's fixed costs are sunk?
b.) How does your answer to (a) change if we are in the middle of a production year?
sunk costs at the beginning of the production... View the full answer
- what about the interest of the loan? isn't the repayment separate from the original cost of the plant so that is also a sunk cost of 6 mil?
- Jun 10, 2018 at 5:26pm
- There is no interest for the loan given (right?). The way the question is phrased, it looks like 6 million has to be paid back each year to repay the loan. It is not possible to identify an interest payment here unless the question gives it to us. At the same time, the loan would be given against certain collateral (right? otherwise the bank should not be lending them the loan). So the loan is a sunk cost and the repayment is a sunk cost as well as because even if the firm closes down the bank will just use the collateral to make for the amount that is not repaid.
- Jun 10, 2018 at 6:02pm