A skilled nursing–facility chain is considering building a new facility on a pie

Question

A skilled nursing–facility chain is considering building a new facility on a piece of property that it currently owns. The property was purchased five years ago for $250,000 and could be sold now at a current market value of $100,000. When estimating the cash flows for the new facility, what amount should be included to recognize the opportunity cost of using the land for the proposed project?

a. $0 (the land is a sunk cost)

b. -$150,000

c. $250,000

d. $100,000

e. -$100,000

a. $0 (the land is a sunk cost)

b. -$150,000

c. $250,000

d. $100,000

e. -$100,000

Explanation / Answer

Costs incurred are sunk costs. Hence, $250,000 should not be taken into consideration. Present market value $100,000 is relevant opportunity loss for constructing new facility.

Hence, correct option is $100,000.

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