4. AVC Oil Company purchased a lot in Tower City 6 years ago at a cost of $302,0

Question

4. AVC Oil Company purchased a lot in Tower City 6 years ago at a cost of $302,000 Today, that lot has a market value of S340,000. At the time of purchase, the company spent $15,000 to level the lot and another $20,000 to install underground pipes The company now wants to build a new facility on that site, and the facility cost is estimated at $1.51 million. What amount should be used as the initial cash flow for this projee? Explain A. -1,470,000 B. $1,850,000 C. -$1,875,000 D. -S1,925,000 E.-$1,945,000

Explanation / Answer

For the purpose of computing invitial investment we consider relevant cost and opportunity cost. Already incurred cos thas no relevance.

Computation of inital cash out flow

Opportunity cost of lot (Market value) = -340000

Facility cost                                     =-1510000

Total cost - 1,850,000

Hence correct answer is option B -$1,850,000

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