The managers of H.R Construction are considering remodeling plans for an old building the firm currently owns. The building was purchased 8 years ago for $689,000. Over the past 8 years, the firm rented out the building and used the rent to pay off the mortgage. The building is now owned free and clear and has a current market value of $898,000. The firm is considering remodeling the building into a conference centre and sandwich bar at an estimated cost of $1.7 million. The estimated present value of the future income from this centre is $2.9 million. Which one of the following defines the opportunity cost of the remodeling project?

Question

Quizplus · Accepted Answer

The opportunity cost of the remodeling project is the current market value of the building. This is because the firm has the option of selling the building at its current market value instead of investing in the remodeling project. By choosing to invest in the remodeling project, the firm is giving up the opportunity to sell the building and earn the current market value. The initial cost of the building and the cost of the remodeling are not relevant for determining the opportunity cost. The sum of these costs (D) and the current market value plus the cost of remodeling (E) are both higher than the opportunity cost and therefore not correct.

The Managers of H