Answer:
The total cost to include in any project analysis should be $1,700,000, which can be apportioned as follows:
Land = $159,000/$617,000 * $1,700,000 = $438,088
Facility = $458,000/$617,000 * $1,700,000 = $1,261,912
Explanation:
The fair market values of the Land and Facility are $438,088 and $1,261,912, being the amounts at which the land and facility could be sold together to obtain $1,700,000.
In project analysis, the relevant cost to include is not the sunk cost of $617,000 ($159,000 and $458,000), but the opportunity cost.
$1,700,000 represents the opportunity cost.
The opportunity cost is the cost that would have been incurred assuming that the land and facility were sold at the first bid. This represents the bid price for the land and facility.
