Question

You have just completed a $16,000 feasibility study for a new coffee shop in some retail space you own. You bought the space two years ago for $102,000​, and if you sold it​ today, you would net $111,000 after taxes. Outfitting the space for a coffee shop would require a capital expenditure of $33,000 plus an initial investment of $5,200 in inventory. What is the correct initial cash flow for your analysis of the coffee shop​ opportunity?

Identify the relevant incremental cash flows​ below:  ​(Select all the choices that​ apply.)

A.Initial investment in inventory.

B.Price you paid for the space two years ago.

C.Amount you would net after taxes should you sell the space today.

D.Capital expenditure to outfit the space.

E.Feasibility study for the new coffee shop.

Calculate the initial cash flow​ below:  ​(Select from the​ drop-down menus and round to the nearest​ dollar.)

1		$
2		$
3		$
4	Free Cash Flow	$

Answer 1

Answer 1:

Explanation:

The relevant cash flows for project evaluations are:

A.Initial investment in inventory.

C.Amount you would net after taxes should you sell the space today and

D.Capital expenditure to outfit the space.

Price you paid for the space two years ago is not relevant. Since it has already been paid irrespective of whether coffee shop​ opportunity is accepted or rejected.

Similarly cost of Feasibility study for the new coffee shop is already paid and is a sunk cost incurred irrespective of whether coffee shop​ opportunity is accepted or rejected.

Answer 2:

As it is cash outflow this is shown as negative amounts.