Solution-Is the renovation fee a sunk cost or not

Is the renovation fee a sunk cost or not

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Reference no: EM132474493

Point 1: Hobart Fisheries Company Ltd (HFC) is a company in aquacultural industry specialised in farming of aquatic organisms. HFC is considering opening a new farm near the Derwent Valley. This project would involve the purchase of 10 hectares land at a price of $1,000,000 (Note that: The land is not subject to depreciation for accounting and tax purposes). In addition to that, the company will need to purchase eight special equiments which cost $125,000 each. The equipments are expected to be in use for 5 years and after that, they will be scrapped without any residual value. Each year, each of these equipments will incur $5,000 maintenance cost.

Point 2: It is assumed that the farm will first be used at the beginning of the next financial year: 1 July 2020.

Point 3: Before starting this new operation, HFC will need to redevelop and renovate the warehouse at the farm. This is expected to cost $200,000. Assume that HFC is not able to claim any annual tax deduction for the capital expenditure to the renovation of the building until the business is sold.

Question 1: Is the renovation fee a sunk cost or not?

Reference no: EM132474493

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Is the renovation fee a sunk cost or not

Reference no: EM132474493

Reference no: EM132474493

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