CrossTown Builders is considering remodeling an old building it currently owns. The building was purchased ten years ago for $1.2 million. Over the past ten years, the firm rented out the building and used the rent to pay off the mortgage. The building is now owned free and clear and has a current market value of $1.9 million. The company is considering remodeling the building into industrial-type apartments at an estimated cost of $1.6 million. The estimated present value of the future income from these apartments is $4.1 million. Which one of the following defines the opportunity cost of the remodeling project?

1. Cost of the remodeling

2. Current market value of the building plus the remodeling costs

3. Current market value of the building

4. Present value of the future income

5. Initial cost of the building plus the remodeling costs

Question

Zavier Huerta

Business

14 April, 15:04

CrossTown Builders is considering remodeling an old building it currently owns. The building was purchased ten years ago for $1.2 million. Over the past ten years, the firm rented out the building and used the rent to pay off the mortgage. The building is now owned free and clear and has a current market value of $1.9 million. The company is considering remodeling the building into industrial-type apartments at an estimated cost of $1.6 million. The estimated present value of the future income from these apartments is $4.1 million. Which one of the following defines the opportunity cost of the remodeling project?

1. Cost of the remodeling

2. Current market value of the building plus the remodeling costs

3. Current market value of the building

4. Present value of the future income

5. Initial cost of the building plus the remodeling costs

+5

Answers (1)

Know the Answer?

Hancock · Answer 1

3. Current market value of the building

Explanation:

The initial cost of the building is a sunk cost.

The alternatives apparently before CrossTown Builders today:

- Modelling the building into apartments, and renting the apartments,

- Selling the building.

If it opts for the first alternative, it loses the opportunity of selling the building for cash flows of $ 1.9 million today. Therefore $ 1.9 million would represent the cost of the opportunity foregone.