Answer to Question #188383 in Economics for Zeshan

Question

Mr. Ali runs a grocery shop from a house that he owns in Lahore. Recently, the shipping company that he used to work for earlier for Rs.95,000 per year, made him an offer for employment. Mr. Ali’s annual income statement is as follows.

Revenue

Rs. 625,000

Cost of good sold

Rs 325,000

Wages (for assistants)

Rs 75,000

Taxes

Rs 30,000

Interest

Rs 5,000

Other Expenses

Rs 15,000

Profit

Rs 175,000

The market value of the shop is Rs 350,000. That is, if he wishes, he could sell the shop for this amount. He could also rent out the building for Rs 50,000 per year. If he sells the business, he can invest and earn an annual return of 9 %. Should Mr. Ali continue in his business or should he join the shipping company?

Answer 1

If Mr. Ali continue in his business, then he will receive profit of Rs 175,000 per year.

If he join the shipping company and invest his money, then he will earn:

95,000 + 50,000 + 350,000×0.09 = Rs 176,500.

So, it is better to accept the offer and sell the business.