Opportunity cost. Revolution Records will build a new recording studio on a vacant lot next to the operations center. The land was purchased five years ago for $450,000. Today the value of the land has appreciated to $780,000. Revolution Records did not consider the value of the land in its NPV calcula- tions for the studio project (it had already spent the money to acquire the and long before this project was considered). The NPV of the recording stu- dio is $600,000. Should Revolution Records have considered the land as part of the cash flow of the recording studio? If yes, what value should be used, 450,000 or $780,000? How will the value affect the project?
Opportunity cost. Revolution Records will build a new recording studio on a vacant lot next to the operations center. The land was purchased five years ago for $450,000. Today the value of the land has appreciated to $780,000. Revolution Records did not consider the value of the land in its NPV calcula- tions for the studio project (it had already spent the money to acquire the and long before this project was considered). The NPV of the recording stu- dio is $600,000. Should Revolution Records have considered the land as part of the cash flow of the recording studio? If yes, what value should be used, 450,000 or $780,000? How will the value affect the project?
Chapter1: Financial Statements And Business Decisions
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Transcribed Image Text:3. Opportunity cost. Revolution Records will build a new recording studio on
a vacant lot next to the operations center. The land was purchased five years
ago for $450,000. Today the value of the land has appreciated to $780,000.
Revolution Records did not consider the value of the land in its NPV calcula-
tions for the studio project (it had already spent the money to acquire the
land long before this project was considered). The NPV of the recording stu-
dio is $600,000. Should Revolution Records have considered the land as part
of the cash flow of the recording studio? If yes, what value should be used,
$450,000 or $780,000? How will the value affect the project?
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