In 20X4, Olentangy Health Care (OHC)'s cost of capital was 6%. Its investments on a historical cost valuation basis are $80,000, on a replacement cost basis are $100,000, and on a current market value basis are $110,000. If you were on OHC's board, what minimum level of annual cash flow would you require in order to continue operations and proceed with planned significant new investments?

A. $4,800

B. $6,000

C. $6,600

D. $8,000

The minimum level of annual cash flow would you require in order to continue operations and proceed with planned significant new investments is C. $6,600

Explanation:

From the data provided;

Cost of capital = 6%

Investments on a historical cost valuation basis = $80,000

Investments on a replacement cost basis = $100,000

Investments on a current market value basis = $110,000

Investment decisions are based on whether the project generates a rate of return that is higher or equals the cost of capital associated with replacing an asset.

Since assets replacement is done at current market value basis.

So,

The minimum level of annual cash flow = Current market value basis × Cost of capital

The minimum level of annual cash flow = $110,000 × 0.06 = $6,600

The minimum level of annual cash flow would you require in order to continue operations and proceed with planned significant new investments = $6,600