Land Valuation for Capital Budgeting Analysis
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1) Your company purchased a piece of land five years ago for $150,000 and subsequently added $175,000 in improvements. The current book value of the property is $225,000. There are two options for future use of the land: 1) the land can be sold today for $375,000 after-tax; or 2) your company can destroy the past improvements and build a factory on the land. In consideration of the factory project, what amount (if any) should the land be valued at for purposes of the capital budgeting analysis? Explain your rationale.
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Solution Summary
This solution of 280 words provides advice to the amount of land that should be valued for purposes of the capital budgeting analysis. It also discusses other criteria that firms use for capital budgeting decisions.
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In consideration of the factory project, the land should be valued with a sales price of $375,000
Since the land could have been sold for $375,000 after-tax, their capital expenditure is the outlay of cash for thier project, which was expected to produce a cash inflow over a period of time exceeding one year (in this case this land was purchased five years ago).
Projects such as these include investments in property, plant, and equipment, ...
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