Question

Shelton Co. purchased a parcel of land six years ago for $871,500. At that time, the firm invested $143,000 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 $53,000 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 $923,000. What value should be included in the initial cost of the warehouse project for the use of this land

Answer 1

$923,000

Step-by-step explanation:

In order to determine the value included in the initial investment of a new project, we must use the opportunity cost of the land. In this case, the opportunity cost of using the land equals its current market value = $923,000.

When considering and evaluating this new project, all prior costs are considered sunk costs because they cannot be recovered.