A Potential Entrepreneur Is Trying to Decide Whether to Open

question 90

Essay

A potential entrepreneur is trying to decide whether to open a new health spa.She currently makes $35,000 per year as an aerobics instructor and will have to give up this job if she opens the new health spa.If she chooses to open the spa,it will cost her $200,000 per year in rent and other operating expenses.
a.What are her accounting costs?
b.What are her opportunity costs?
c.How much would she need to make in revenues to earn positive accounting profits?
Positive economic profits?

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Definitions:

Call Delta

An option's sensitivity measure that indicates how much the price of the call option is expected to change in response to a one-point change in the price of the underlying asset.

Two-State

Usually references a model involving two possible outcomes or states, often used in finance to model investment under uncertainty.

Hedge Ratio

The ratio used to calculate the number of derivatives needed to hedge a particular risk exposure.

Hedge Ratio

A ratio used to measure the proportion of exposure that is protected from risk through hedging activities.