Question

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 $470,000. Today, the value of the land has appreciated to $760,000. 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 $570,000. Should Revolution Records have considered the land as part of the cash flow of the recording studio? If yes, what value should be used, $470,000 or $760,000? How will the value affect the project? Should Revolution Records have considered the land as part of the cash flow of the recording studio? (Select the best response.) O A. No. O B. Yes. Click to select your answer and then click Check Answer. 2 parts 2 remaining ining - Clear All Final Check

Answer 1

Answer B . Yes Land Cost should be considered for calculating cash flows.

$760000 should be considered as it is the fair market value on the date of investment

Revised NPV=570000-760000= -190000