Question

10.3 Opportunity cost. 

Revolution Records will build a new recording studio on a vacant lot next to the operations center. The land was purchased five years ago for ​$500,000. Today, the value of the land has appreciated to ​$710,000. Revolution Records did not consider the value of the land in its NPV calculations for the studio project​ (it had already spent the money to acquire the land long before this project was​ considered). The NPV of the recording studio is $590,000.

Should Revolution Records have considered the land as part of the cash flow of the recording​ studio?

If​ yes, what value should be​ used, ​$500,000 or ​$710,000​?  

How will the value affect the​ project?

Answer 1

Yes, the land should have been considered as part of the cash flow.

$500,000 should be used as a value of the land in the calculation of NPV.

The value of land will decreae the NPV of the recording studio to $90,000.