A company is considering expanding an existing plant on a piece of land that it

Question

A company is considering expanding an existing plant on a piece of land that it already owns. The land was purchased 15 years ago for €325 000. 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?

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A company is considering expanding an existing plant on a piece of land that it

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