. The Green Shingle purchased a parcel of land 6 years ago for $299,500. Since the...

. The Green Shingle purchased a parcel of land 6 years ago for $299,500. Since the firm wasn't ready to use the site itself at that time, it decided to lease the land for $28,000 a year. The Green Shingle is now considering building a hotel on the site. The current value of the land is $347,500. The firm has a mortgage secured by the property with $12,670 annual interest expenses, and would need to spend $64,000 to improve the land for construction. Which of the following is correct?

A. The purchase price of the parcel of land 6 years ago is a sunk cost for the project.
B. The current value of the land is an opportunity cost for the project.
C. The $12,670 annual interest expenses are a relevant cash flow for the project.
D. The $64,000 expense to improve the land is an irrelevant cash flow for the project.
E. A and B only.

F. A and C only.

Solutions

Expert Solution

Sunk cost is a past cost that has already been incurred and is not relevant.

The purchase price of the parcel of land 6 years ago is a sunk cost for the project.

The current value of the land is an opportunity cost for the project, this amount can be realized if the Land is sold currently.

Annual interest expense is not relevant as it will be incurred under both alternatives.

Option E A and B only is correct

ekkarill92 answered 1 year ago

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