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Geico is considering expanding an existing plant on a piece of
land it already owns. The land was pu 1 answer below » Geico is considering expanding an existing plant on a piece of
land it already owns. The land was purchased 15 years ago for
$325,000, and its current market appraisal is $820,000. A capital
budgeting analysis shows that the plant expansion has a net present
value of $130,000. The expansion will cost $1.73 million, and the
discounted cash inflows are $1.86 million. The expansion cost of
$1.73 million does not include any provision for the cost of the
land. The manager preparing the analysis argues that the historical
cost of the land is a sunk cost, and since the firm intends to keep
the land View complete question » Geico is considering expanding an existing plant on a piece of
land it already owns. The land was purchased 15 years ago for
$325,000, and its current market appraisal is $820,000. A capital
budgeting analysis shows that the plant expansion has a net present
value of $130,000. The expansion will cost $1.73 million, and the
discounted cash inflows are $1.86 million. The expansion cost of
$1.73 million does not include any provision for the cost of the
land. The manager preparing the analysis argues that the historical
cost of the land is a sunk cost, and since the firm intends to keep
the land whether or not the expansion project is accepted, the
current appraisal value is irrelevant. Should the land be included in the analysis? If so, how? View less » Aug 05 2015 04:00 AM
