Question

Marshall's & Co. purchased a corner lot in Eglon City five years ago at a cost of $640,000. The lot was recently appraised at $810,000. At the time of the purchase, the company spent $50,000 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 $1.2 million. What amount should be used as the initial cash flow for this building project?
Select one:

a. $1,200,000

b. $1,840,000

c. $1,890,000

d. $2,010,000

e. $2,060,000

Answer 1

Answer:

Option (d) is correct.

Explanation:

Given that,

Cost of corner lot = $640,000 (five years ago)

Lot was recently appraised = $810,000

Spent on to grade the lot = $50,000

Spent on to build a small building on the lot = $4,000

Estimated building cost for new retail store = $1.2 million

                                                                        = $1,200,000

Therefore,

Initial cash flow for this building project:

= Estimated building cost + Appraised value of lot

= $1,200,000 + $810,000

= $2,010,000