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 is the amount that the company could receive if it sold the land today. The book value of the property is not relevant to the decision of whether or not to build a factory on the land, as this cost has already been incurred and cannot be recovered.

Your Company Purchased a Piece of Land ﬁVe Years Ago