Geico is considering expanding an existing plant on a piece of land it already o

Question

Geico is considering expanding an existing plant on a piece of land it already owns. The land was purchased 15 years ago for $325,000, and its current market appraisal is $820,000. A capital budgeting analysis shows that the plant expansion has a net present value of $130,000. The expansion will cost $1.73 million, and the discounted cash inflows are $1.86 million. The expansion cost of $1.73 million does not include any provision for the cost of the land. The manager preparing the analysis argues that the historical cost of the land is a sunk cost, and since the firm intends to keep the land whether or not the expansion project is accepted, the current appraisal value is irrelevant.

Should the land be included in the analysis? If so, how?

Explanation / Answer

Hi,

The manager is right in his view that the land is a sunk cost now. The company has already paid for the land and it does not matter now if the value has appraised or depreciated.

Related Questions

Navigate

• Browse (All)
• Browse G
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.