Question

Five years ago, Mayer Corp purchased a plot of land for $2,065,707. Currently the land is worth $3,380,483. To make the land suitable for a new store to be built, the land will require $89,099 worth of landscaping. To help determine the potential sales generated by a store in this location, Mayer Corp. paid $143,377 dollars for a traffic study. What is the appropriate cash flow at time 0 for this investment?

(Enter the magnitude of your answer. Ex: 123 not -123)

Answer 1

Amount paid for traffic study is a sunk cost and already incurred and hence not included in cash flow calculation

The current value of land is to be taken into consideration as it represents opportunity cost as it can be sold if store is not opened.

The land also required grading without which it can not be used, so it is also a part of cash flow calculation

Appropriate cash flow at time 0 = current value of land + grading expenses

Appropriate cash flow at time 0 = 3380483 + 89099 = 3469582

Answer : 3469582 (Thumbs up please)