Natural Pharmaceuticals, Limited owns a manufacturing facility that is currently

Question

Natural Pharmaceuticals, Limited owns a manufacturing facility that is currently sitting idle. The facility is located on a piece of land that originally cost $267,000. The facility itself cost $1,460,000 to build. As of now, the book value of the land and the facility are $267,000 and $617,000, respectively. The firm owes no debt on either the land or the facility at the present time. The firm received a bid of $1,619,000 for the land and facility last week. The firm's management rejected this bid even though they were told that it is a reasonable offer in today's market. If the firm was to consider using this land and facility in a new project, what cost, if any, should it include in the project analysis?

Explanation / Answer

Amount as per book=267,000+617,000=884000

Amount recived from bid=1,619,000

Since the bid price (market rate) is higher than the book value , $1,619,000(marke value) should be considered as the cost of using this land and facility in a new project

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