Question

The Market Farms purchased a parcel of land six years ago for $200,000. At that time, the firm invested $75,000 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 $40,000 a year. The Market Farms is now considering building a hotel on the site as the rental lease is expiring. The current value of the land is $225,000. The firm has no loans or mortgages secured by the property. What value should be included in the initial cost of the hotel project for the use of this land? Multiple Choice $0 $200,000 $225,000 $229,000 $101,900

Answer 1

$225000

The current value of land is the opportunity cost of using the Land. The market value of the land will be lost if the hotel is built on the site. Hence the opportunity cost of the land should be added in the initial cost.