Your company purchased a piece of land five years ago for $150,000 and subsequently added $175,000 in improvements. The current book value of the property is $225,001. There are two options for future use of the land: 1) the land can be sold today for $375,000 on an after-tax basis; 2) your company can destroy the past improvements and build a factory on the land. In consideration of the factory project, what amount (if any) should the land be valued at?

Question

Quizplus · Accepted Answer

The land should be valued at its after-tax salvage value of $375,000 because this represents the opportunity cost of using the land for the factory project instead of selling it. This is the most relevant value for decision-making purposes.

Your Company Purchased a Piece of Land Five Years Ago