A local restaurant owner is considering expanding into another rural area. The e

Question

A local restaurant owner is considering expanding into another rural area. The expansion project will be financed through a line of credit with City Bank. The administrative costs of obtaining the line of credit are $500, and the interest payments are expected to be $1,000 per month. The new restaurant will occupy an existing building that can be rented for $2,500 per month. The incremental cash flows for the new restaurant include:

A.$2,500 per month rent

B. $500 administrative costs, $1,000 per month interest payments, $2,500 per month rent

C. $1,000 per month interest payments, $2,500 per month rent

D. $500 administrative costs, $2,500 per month rent

Explanation / Answer

Incremental income is the extra working income that an association gets from taking another venture. A positive incremental income implies the organization's income will increment with the acknowledgment of the Project.

B. $500 Administrative cost is a Sunk cost. These are initial cost to analyses a project that cannot be recovered if the project is even accepted but they don't affect the future cash flow of the project.

C. $2500 per month rent is the opportunity cost, it helps in utilizing an asset for another alternative, which does affect the future cash flow, so it comes in cash flow of a new project. $1000 per month interest is increased cost or cost for a new project which does affect the future cash flow, so it comes in cash flow of a new project. $2500 per month rent is the opportunity cost, it helps in utilizing an asset for another alternative, which does affect the future cash flow, so it comes in cash flow of a new project.

D. $500 Administrative cost is a Sunk cost. These are initial cost to analyses a project that cannot be recovered if the project is even accepted but they don't affect the future cash flow of the project. $2500 per month rent is the opportunity cost, it helps in utilizing an asset for another alternative, which does affect the future cash flow

Answer is (A). The incremental cash flow for the new restaurant $2500 per month rent. The other costs should be taken into account in the discount factor, as they are costs of financing $2,500 per month rent.

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.