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?

  • CreatedDecember 15, 2014
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