Calculating the Net Present Value of a New Office Complex

What is the appropriate incremental cash flow for the use of the land when calculating the NPV of the new office complex?

Given that the current book value of the land is $100,000, but a buyer is willing to pay $650,000 for it.

Answer:

The appropriate incremental cash flow for the use of the land when calculating the NPV of the new office complex would be $650,000.

When evaluating the net present value of a new project, it is crucial to consider the opportunity cost of resources, including land. In this scenario, the book value of the land is $100,000, but a potential buyer is willing to pay $650,000 for it. This means that the land has a market value significantly higher than its book value.

The incremental cash flow for NPV calculations should reflect this market value, as it represents the true economic benefit or cost of utilizing the land for the new office complex. In this case, utilizing the land would result in foregone revenue of $650,000 if sold to the outside buyer, making it the appropriate incremental cash flow for the NPV calculation.

Ignoring taxes, focusing on the market value of the land ensures a more accurate evaluation of the potential returns and profitability of the new office complex project. By including the $650,000 as the incremental cash flow, the NPV calculation will provide a clearer picture of the project's financial viability and return on investment.