Your buddy Gabe owns a sports restaurant/bar in St. Louis. On a recent visit, Gabe shared the following information on his annual revenue and costs:
Revenues
Sales of food and drinks: $250,000
Costs
Wholesale cost of food and beer: $60,000
Wages and salaries: $70,000
taxes and insurance: $15,000
rent on building: $20,000
interest paid on bank loans (for other capital): $8,000 (10% on $80,000 borrowed funds)
(a) Assume that Gabe has a standing offer of $70,000 to manage another bar in St. Louis. Calculate Gabe’s economic profit and compare to his accounting profit.
(b) Suppose a national restaurant/bar chain offers Gabe $100,000 to sell his bar (which includes assuming the loan used in the business). Is this a good deal for Gabe? (To answer, assume a 10% rate of interest and then convert the $100,000 offer to an annualized equivalent.)