where did you get this question from? schweser?
This question was one of the many given to me as part of a Financial Management course at the university.
So… what’s the answer? The wording is strange on this one. Since NPV is the PV of net “cash flows” I think you would have to use C, but this one made me think for a while at first. The land should be carried at $200k on the balance sheet, but that is not what the question is asking. And I don’t think it should be $500k b/c I don’t believe NPV takes opportunity cost into account since opportunity cost is not a cash flow.
Estimated Cash flows used in NPV calculations for Capital Budgeting decisions should exclude sunk costs but consider Opportunity costs (cash flows that a firm will lose by undertaking this project), externalities, cannabalized sales etc So should’nt it be $500k because that’s what the sale of land at market value today would yield?
Livelylatin never posted the correct answer. Lively - Are you using AF participants to do your homework?
Sorry guys for not replying promptly but I was told the answer was c) and it seemed incorrect. It’s not homework, but a past paper.