Revolution Records will build a new recording studio on a va

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 calculations for the studio project and came up with an NPV of $600,000. What is the correct NPV value?

Please Explain the answer, thanks!

Solution

The opportunity cost concept should be applied here. The relevant cost is an opportunity cost hence, for NPV the current market value is $780,000 is the relevant cost.

Correct NPV for the project: NPV = $780,000