Reference no: EM132927959

Carroll Tree Ranch is considering expanding an existing plant on a piece of land it already owns. The land was purchased 15 years ago for $162,500 and its current market appraisal is $410,000. A capital budgeting analysis shows that the plant expansion has a net present value of $65,000. The expansion will cost $865,000, and the discounted cash inflows are $930,000. The expansion cost of $865,000 does not include any provision for the cost of the land. The manager preparing the analysis argues that the historical cost of the land is a sunk cost-a cost that has already been incurred and thus cannot be recovered-and since the firm intends to keep the land whether or not the expansion project is accepted, the current appraisal value is irrelevant.

Problem 1: Should the land be included in the analysis? Explain why or why not.