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 $560,000. The lot was recently appraised at $582,000. At the time of the purchase, the company spent $43,000 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 $1,190,000. What amount should be used as the initial cash flow for this building project?

$1,758,300

Options:

$1,780,300

$1,772,000

$1,776,300

$1,750,000

Marshall's & Co. purchased a corner lot in Eglon City five years ago at a cost of $560,000. The lot was recently appraised at $582,000. At the time of the purchase, the company spent $43,000 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 $1,190,000. What amount should be used as the initial cash flow for this building project?

Explanation / Answer

The lot would be valued at lower of the ,market realisable value or the value of the expenditure. In this the case, the value od expenditure is $607,000 (= $60,000 + $43,000 + $4,000) and the market value is $582,000. So, the value to be considered is $582,000.

Therefore, the initial cash flow for this building project = $1,190,000 + $582,000

= $1,772,000 which the 2nd option

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