Subject: Financial Management (1,15)

Opportunity Costs

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. Revolutionary Records did not consider the value of the land (it had already spent the money to acquire the land long before this project was considered). The NPV of the recording studio was $600,000. How will the value affect the project?

1. The rate of return on the land is ______%. (2 decimals)

2. Should Revolution Records consider the land as part of the cash flow of the recording studio? A) Yes B) No

3. If yes, what value should be used, $450,000 or $780,000?