Question

You have just completed a feasibility study for a new coffee shop in some retail space you own. You bought the space two years ago for , and if you sold it today, you would net after taxes. Outfitting the space for a coffee shop would require a capital expenditure of plus an initial investment of in inventory. What is the correct initial cash flow for your analysis of the coffee shop opportunity?

1) Feasibility study for the new coffee shop.
2) Initial investment in inventory.
3) Capital expenditure to outfit the space.
4) Price you paid for the space two years ago.
5) Amount you would net after taxes should you sell the space today.

Answer 1

The initial cash flow for the new coffee shop should include the cost of the feasibility study, the investment in inventory, and the capital expenditure to outfit the space. The price originally paid for the space and the potential net from selling it are not included in this calculation, as one is a sunk cost and the other an opportunity cost.

Step-by-step explanation:

To calculate the initial cash flow for the analysis of the coffee shop opportunity, certain expenses must be considered. Relevant costs include the feasibility study for the new coffee shop, the initial investment in inventory, and the capital expenditure to outfit the space for the coffee shop.

The price paid for the retail space two years ago and the potential net amount from selling the space today are not included in initial cash flow calculation, as they are sunk costs and an opportunity cost respectively.

To determine the initial cash flow, you would add up the explicit costs associated with starting the coffee shop which are the feasibility study cost, initial inventory investment, and capital expenditure for outfitting the space.