Speck Inc. purchased a tract of land 3 years ago at a cost of $280,000. Speck is

Question

Speck Inc. purchased a tract of land 3 years ago at a cost of $280,000. Speck is now considering building a new manufacturing plant on the land. A recent appraisal put the land’s value at $435,000, for which the company is assumed to be able to sell it if necessary. What amount relative to the land (ignoring any tax implications) should be included in the capital budgeting analysis on whether to accept or reject the project?

Zero

$280,000

$435,000

$280,000 plus interest for three years

Zero

$280,000

$435,000

$280,000 plus interest for three years

Explanation / Answer

Here cost incurred for acquiring in past is sunk cost, hence should not be considered in decision making. Present resale value of land is relevant cost and should be considered in decision making.

Hence, correct option is $435,000

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