The Corner Market has decided to expand its retail store by building on a vacant lot it currently owns. This lot was purchased fourteen years ago at a cost of $99,000, which the firm paid in cash. During the last fourteen years, the firm has spent another $38,000 on land improvements, all of which was also paid in cash. Today, the lot has a market value of $329,000. What value should be included in the analysis of the expansion project for the cost of the land

Question

Harmony Sanford

Business

14 October, 00:29

The Corner Market has decided to expand its retail store by building on a vacant lot it currently owns. This lot was purchased fourteen years ago at a cost of $99,000, which the firm paid in cash. During the last fourteen years, the firm has spent another $38,000 on land improvements, all of which was also paid in cash. Today, the lot has a market value of $329,000. What value should be included in the analysis of the expansion project for the cost of the land

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Michaela · Answer 1

Answer: C. The current market value of the land

Explanation:

The previous costs incurred should be considered irrelevant because they are sunk costs. They have already been incurred and according to the principle of Relevant Cost in Accounting, such information should not be taken into account when analysing a project as it could lead to management making the wrong decision due to information clutter.

What matters now is the current market value of the lot and that is what should be included in the analysis of the expansion project for the cost of the land.