A corporate manager decides to build a new store on a lot owned by the corporation that could be sold to a local developer for $250,000.The lot was purchased for $50,000 twenty years ago.When determining the value of the new store project,
A) the cost of the lot is zero since the corporation already owns it.
B) the opportunity cost of the lot is $250,000 and should be included in calculating the value of the project.
C) the cost of the lot for valuation purposes is $50,000 because land does not depreciate.
D) the incremental cash flow should be the $50,000 original cost less accumulated amortization.

Question

Quizplus · Accepted Answer

The opportunity cost of using the lot for the new store is $250,000, the amount the corporation could have received from selling it to a developer. This represents the foregone benefit of the next best alternative use of the lot and should be included in the project's valuation.

A Corporate Manager Decides to Build a New Store on a Lot