Marshall\'s & Co. purchased a corner lot in Eglon City five years ago at a cost

Question

Marshall's & Co. purchased a corner lot in Eglon City five years ago at a cost of $530,000. The lot was recently appraised at $555,000. At the time of the purchase, the company spent $40,000 to grade the lot and another $3,100 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 $1,100,000. What amount should be used as the initial cash flow for this building project?

1. $ 1,630,000
2. $ 1,637,100
3. $ 1,655,000
4. $ 1,659,000
5. $ 1,662,100

A project is expected to create operating cash flows of $27,500 a year for three years. The initial cost of the fixed assets is $57,000. These assets will be worthless at the end of the project. An additional $2,500 of net working capital will be required throughout the life of the project. What is the project's net present value if the required rate of return is 8 percent?

1. $ 13,354.75
2. $ 10,854.75
3. $ 11,370.17
4. $ 3,375.00
5. $ 15,584.75

Explanation / Answer

Amount should be used as the initial cash flow for this building project

=$1,100,000 + $555,000 = $ 1,655,000

3. $ 1,655,000

What is the project's net present value if the required rate of return is 8 percent?
NPV = 27500 PVIFA(8%,3) + 2500 PVIF(8%,3) - 57000-2500
= $13,354.75

1. $ 13,354.75

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