Question

Tar Heel Auto Parts owns a manufacturing facility that is currently sitting idle. The facility is located on a piece of land that cost $134,000 at the time Tar Heel Auto Parts bought it (several years ago). The facility itself cost $700,000 to build. The current book values of the land and the facility are $134,000 and $214,000, respectively. Tar Heel Auto Parts received a bid of $640,000 for the land and facility last week. They rejected this bid even though they were told that it is a reasonable offer in today's market. If Tar Heel Auto Parts were to consider using this land and facility in a new project, what cost, if any, should they include in the project analysis?

Answer 1

Tar Heel Auto Parts

The cost that Tar Heel Auto Parts should include in their new project analysis for the land and facility should be:

= $640,000.

Step-by-step explanation:

a) Data and Analysis:

Cost Book Value

Cost of a piece of land $134,000 $134,000

Cost of idle manufacturing facility $700,000 $214,000

Current market value of the land and facility = $640,000

b) The current market value of Tar Heel's land and facility is the relevant cost for project analysis. The book value and the cost prices are no longer relevant as they relate to the past and are sunk and historical costs. Sunk and historical costs do not make any difference in decision making. The fair or current market value is a future value that is useful for Tar Heel's project analysis and decision making.