Marshall's purchased a corner lot five years ago at a cost of $498,000 and then spent $63,500 on grading and drainage so the lot could be used for storing outdoor inventory. The lot was recently appraised at $610,000. The company now wants to build a new retail store on the site. The building cost is estimated at $1.1 million. What amount should be used as the initial cash flow for this building project?

Question

Business

Maia Arroyo

15 September, 01:01

Marshall's purchased a corner lot five years ago at a cost of $498,000 and then spent $63,500 on grading and drainage so the lot could be used for storing outdoor inventory. The lot was recently appraised at $610,000. The company now wants to build a new retail store on the site. The building cost is estimated at $1.1 million. What amount should be used as the initial cash flow for this building project?

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Answers (1)

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Heather Reyes · Answer 1

The initial investment is $1,100,000.

Explanation:

The corner lot is a sunk cost. This means that the cost of the lot will exist whether the project is made or not. Therefore, it shouldn't be taken into account.

The initial investment is building cost. In this case $1,100,000.