Question

Your company purchased a piece of land five years ago for $150,000 and subsequently added $175,000...

Your company purchased a piece of land five years ago for $150,000 and subsequently added $175,000 in improvements. The current book value of the property is $225,000. There are two options for future use of the land: 1) the land can be sold today for $450,000 on a net after-tax basis; 2) your company can destroy the past improvements and build a factory on the land. In consideration of the factory project, what amount (if any) should the land be valued at?

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Answer #1

As per the fair value concept, today’s market value ($450,000) could be the value of land; but the improvements on the land that is done earlier are demolished for factory project. Therefore, such improvement cost ($175,000) is no longer required and it should be subtracted from the fair value of land.

Value of land = Market value – Earlier improvement cost

                        = $450,000 - $175,000

                        = $275,000 (Answer)

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