Question

A local restaurant owner is considering expanding into another rural area. The expansion project will be financed through a line of credit with City Bank. The administrative costs of obtaining the line of credit are $500, and the interest payments are expected to be $1,000 per month. The new restaurant will occupy an existing building that can be rented for $2,500 per month. The incremental cash flows for the new restaurant include:a. $2,500 per month rentb. $500 administrative costs, $1,000 per month interest payments, $2,500 per month rentc. $1,000 per month interest payments, $2,500 per month rentd. $500 administrative costs, $2,500 per month rent

Answer 1

Answer:

a. $2,500 per month rent

Explanation:

The incremental cash flows for the new restaurant would be $2,500 per month only as $500 would be the administrative cost which reflects the sunk cost and the expected interest payment is $1,000 which is not considered for the new restaurant as it is not relevant while computing the incremental cash flows

So, only $2,500 would be considered as it is related to the new restaurant