Brookfield Multiplex 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 is the cost that will be incurred if the project goes ahead. The cost of the land is not relevant since it has already been purchased and can be sold regardless of whether the new building is constructed or not. The cost of the environmental impact study is a sunk cost and is not relevant for future decision-making. Therefore, the only relevant cost is the cost of constructing the new building, which is $2,500,000. Adding the irrelevant costs (land and environmental impact study), the total cost would be $3,050,000. Therefore, the best choice is option C.

Brookfield Multiplex Has Estimated That a New Building Will Cost