Your firm purchased a warehouse for $350,000 six years ago. Four years ago,repairs were made to the building which cost $60,000. The annual taxes on the property are $20,000. The warehouse has a current book value of $273,000 and a market value of $305,000. The warehouse is totally paid for and solely owned by your firm. If the company decides to assign this warehouse to a new project,what value,if any,should be included in the initial cash flow of the project for this building?

Question

Quizplus · Accepted Answer

The market value of the warehouse should be used as the initial cash flow if the company decides to assign it to a new project. The book value of $273,000 and the original cost of $350,000 are both irrelevant as they do not reflect the current market value. The cost of repairs and annual taxes are sunk costs and should not be included in the initial cash flow. Therefore, the market value of $305,000 should be used.

Your Firm Purchased a Warehouse for $350,000 Six Years Ago