Question

Shelton Co. purchased a parcel of land six years ago for $866,500. At that time, the firm invested $138,000 in grading the site so that it would be usable. Since the firm wasn't ready to use the site itself at that time, it decided to lease the land for $50,500 a year. The company is now considering building a warehouse on the site as the rental lease is expiring. The current value of the land is $918,000. What value should be included in the initial cost of the warehouse project for the use of this land?

Answer 1

$918,000 should be included in the initial cost of the warehouse project.

Step-by-step explanation:

Capitalised cost of an asset includes all the costs incurred to make the asset operational or usable.

In this question warehouse project incurred many expense to build the warehouse, as all of these expenses are sunk cost and will not be considered for the warehousing project.

We will only consider the current value of the land for this purpose which is $918,000.

Answer 2

Answer: $918,000

Explanation: Since Shelton Co is considering building a warehouse on the site because the rental lease is expiring then in evaluating the new project all the relevant cash flows must be considered in the protect evaluation. Market value of the land used for constructing the building is an opportunity cash flow and so must be considered. The Relevant cost of opportunity for land will be its fair value.

Therefore ,the initial cost cost of the warehouse project for the use of this land is $918, 000.