Columbus Prime Properties, Inc owns a two-story building in the uptown Columbus,
ID: 2746009 • Letter: C
Question
Columbus Prime Properties, Inc owns a two-story building in the uptown Columbus, GA. The company has a tenant in the first floor. The company is considering an offer from a potential tenant for an annual lease on the second floor. If the company decides to lease the second floor, it expects to incur, among other things, a total of $6,000 annual maintenance costs for the entire building, which currently costs $5,000 a year with only one tenant in the first floor. How much of the maintenance costs should the company consider in the capital budgeting analysis on the new lease?
$6,000
$3,000
$1,000
$0
Explanation / Answer
Relevant costs are those costs which are incurred if any new decision is taken. They are required to be done if there is any change in current situations.
In the present case, the current cost of maintenance is $ 5,000 and this cost will increase to $6,000 if new lease is offered. So, additional cost of lease = $6,000 - $5,000 = $1,000
So, the company should consider $1,000 in the capital budgeting analysis on the new lease and option C is the correct option.