Question

You have just completed a $15,000 feasibility study for a new coffee shop in some retail space you own. You bought the space two years ago for $98,000?,

and if you sold it? today, you would net $111,000

after taxes. Outfitting the space for a coffee shop would require a capital expenditure of $26,000 plus an initial investment of $5,000 in inventory. What is the correct initial cash flow for your analysis of the coffee shop? opportunity?

Identify the relevant incremental cash flows? below:???(Select all the choices that? apply.)

A. Amount you would net after taxes should you sell the space today.

B. Capital expenditure to outfit the space.

C. Price you paid for the space two years ago.

D. Feasibility study for the new coffee shop.

E.Initial investment in inventory.

Answer 1

The sale of the retail space today would give us $111,000. Hence this is an opportunity cost with respect to the coffee shop project and must be considered in our analysis. The initial cost is not relevant since it is already paid two years ago (the tax benefits could have been considered, but we already have the post tax value).

Also the feasibility study is a sunk cost and has to be paid regardless of whether we take on the project. Hence it is irrelevant.

Thus Initial Cash Flow = Opportunity cost + capex + inventory investment = 111,000 + 26,000 + 5000 = $142,000 (outflow)

The relavant items are A, B and E.