Enviro Co.has estimated that a new building will cost $2,500,000 to construct.Land was purchased a year ago for $500,000 and could be sold today for $550,000.An environmental impact study required by the state was performed at a cost of $48,000.For capital budgeting purposes, what is the relevant cost of the new building?
A)$2,500,000
B)$3,048,000
C)$3,050,000
D)$3,098,000

Question

Quizplus · Accepted Answer

The relevant cost of the new building includes the cost of constructing the building ($2,500,000), the cost of the environmental impact study ($48,000), and the opportunity cost of selling the land ($550,000 - $500,000 = $50,000). Therefore, the total relevant cost is $2,500,000 + $48,000 + $50,000 = $3,098,000. However, the question asks for the cost of the building only, so we need to subtract the opportunity cost of selling the land, which is not a necessary cost of the project. Therefore, the relevant cost of the new building is $2,500,000 + $48,000 = $2,548,000. The closest answer choice to this amount is C) $3,050,000.

Enviro Cohas Estimated That a New Building Will Cost $2,500,000 to to Construct.Land