Question

Marshall's & Co. purchased a corner lot in Eglon City five years ago at a cost of $640,000. The lot was recently appraised at $810,000. At the time of the purchase, the company spent $50,000 to grade the lot and another $4,000 to build a small building on the lot to house a parking lot attendant who has overseen the use of the lot for daily commuter parking. The company now wants to build a new retail store on the site. The building cost is estimated at $1.2 million. What amount should be used as the initial cash flow for this building project?

		$2,010,000
		$1,200,000
		$1,890,000
		$1,840,000

Answer 1

Initial cash flow for this building project

Initial cash flow for this building project would consist of the estimated building cost plus the opportunity cost of the land (appraised value of the land purchased)

Therefore, the Initial cash flow for this building project = Estimated Building cost + Opportunity cost

= $12,00,000 + $810,000

= $20,10,000

“Hence, the Initial cash flow for this building project would be $20,10,000”

NOTE

The amount spent towards grade the lot and to build a small building are not considered as the initial cash flow since, those expenses are not incremental.