A general contractor is planning to start a new construction business and estimates the following startup costs: office lease deposit $5,000, equipment purchase $75,000, initial inventory $15,000, licensing fees $2,500, and working capital needs $25,000. What are the total startup costs?
Correct Answer
C) $122,500
Total startup costs = $5,000 + $75,000 + $15,000 + $2,500 + $25,000 = $122,500. All listed items are legitimate startup expenses that should be included in business planning.
Why This Is the Correct Answer
Option B is correct because it represents the accurate sum of all startup costs listed in the problem. The calculation involves adding five distinct expense categories: office lease deposit ($5,000), equipment purchase ($75,000), initial inventory ($15,000), licensing fees ($2,500), and working capital needs ($25,000). Each of these represents a legitimate business startup expense that contractors must account for when planning their initial capital requirements. The total of $122,500 reflects comprehensive startup planning that includes both immediate expenses and working capital reserves.
Why the Other Options Are Wrong
Option A: $125,000
Option A ($117,500) is incorrect because it represents an incomplete sum that is $5,000 short of the actual total, suggesting one of the expense categories was omitted or miscalculated in the addition.
Option B: $120,000
Option C ($120,000) is incorrect because it falls $2,500 short of the actual total, likely resulting from omitting the licensing fees or making an arithmetic error during calculation.
Option D: $117,500
Option D ($125,000) is incorrect because it exceeds the actual total by $2,500, suggesting either double-counting of an expense category or an addition error.
Memory Technique
Remember 'OEILW' - Office, Equipment, Inventory, Licensing, Working capital - the five key startup cost categories contractors must budget for when starting a business.
Reference Hint
Business and Finance chapter covering startup costs and capital requirements for construction businesses
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