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- This topic has 3 replies, 2 voices, and was last updated 4 years ago by
John Moffat.
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- November 7, 2020 at 2:01 pm #594363
Sir I have a problem with the following question
A company is planning to open a new store in a new geographic location.An initial site evaluation has taken place at a cost of $5000 and a store location has been found.The new store can be rented for $9500 per annum.It will require refurbishment at a cost of $320,000
Which of the following costs are relevant for an NPV calculation?
1) $5,000
2) $9,500
3) $320,000Sir the answer in the book said 2)&3)
My doubt is why can’t all of them be the answer
They said that they are evaluating the initital cost but they never said that they have already bought the land
The question seems to say that they are also planning to open a new storeHowever, the book answer says that $5,000 is already a cost incurred in the business and is a sunk cost
How is this possible sir
They haven’t even told that the land is bought
They just said it is being ‘evaluated’If it is being evaluated it means they haven’t come to a decision yet ryt and it is being planned for the future
So I thought all of them are future costs but the book says that the 5000 is already a cost borne
Sir please help me clear this confusion and explain how the book came up to a decision to assume that the 5000 was already a sunk cost
Thank you
November 7, 2020 at 2:07 pm #594366The question says “the initial site evaluation has taken place” – therefore it has already happened and it is not that it is currently being evaluated. Therefore the $5,000 is payable whether or not they open the store.
(And there is no mention of buying any land. They are renting the store! )
November 7, 2020 at 2:16 pm #594367Oh alright thank you sir
November 8, 2020 at 9:56 am #594401You are welcome 🙂
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