Dilwater Furniture purchased a corner lot in Pittsburg five years ago at a cost of $890,000. The lot was recently appraised at $1,070,000. At the time of the purchase, the company spent $80,000 to grade the lot and another $120,000 to pave the lot for commuter parking. The company now wants to build a new retail store on the site. The building cost is estimated at $1.8 million. What amount should be used as the initial cash flow for this building project?

Question

Eugene Cross

Business

4 November, 00:24

Dilwater Furniture purchased a corner lot in Pittsburg five years ago at a cost of $890,000. The lot was recently appraised at $1,070,000. At the time of the purchase, the company spent $80,000 to grade the lot and another $120,000 to pave the lot for commuter parking. The company now wants to build a new retail store on the site. The building cost is estimated at $1.8 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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Emelia · Answer 1

Initial cash flow (1,800,000)

Explanation:

The initial cash flow for this building project will be the expected cost for the building 1,800,000 million on the building cost.

The land, is a sunk cost. The company will not need to invest 1,070,000 millon to acquire the land, it already have the land. So are the upgrades made on previous periods.

To know if the building will be profitable It will need a present value greater than his cost of 1,800,000 at Dilwater Furtinure discount rate.