WiX undefined preprocessor variable

I'm starting to use WiX in order to do automated builds to create msi's of my c# projects and am experiencing the error "Undefined preprocessor variable '$(var.MyProject.TargetDir)'"

I am using the latest WiX v3.0.5419. Inside my wxs file I am trying to use pre-processor variables that are listed on this webpage (http://blogs.msdn.com/jrock/archive/2008/01/29/complete-list-of-candle-preprocessor-variables.aspx)

<Component Id="MyId" Guid="MyGuid">
   <File Id="MyId" Name="MyName" KeyPath="yes" 
      Source="$(var.MyProject.TargetDir)\MyName.dll" />
</Component>

I have added the reference for MyProject to the .wixproj and if I open it up in Notepad I can see the reference.

<ItemGroup>
  <ProjectReference Include="..\MyProject.csproj">
    <Name>MyProject</Name>
    <Project>{guid}</Project>
    <Private>True</Private>
  </ProjectReference>
</ItemGroup>

This is my nant build script that I use to create the msi. Maybe it's because the .wixproj knows about the project reference which isn't used in the build?

<exec basedir="${tools.wix}" managed="true" program="candle.exe">
  <arg line='-out "${tools.wix.objfile}"' />
  <arg value="../MySetup.wxs" />
</exec>

Can anyone enlighten me on this please?

As you already remarked, your nant build script is not using the wixproj file at all.

You are mixing two different ways to build a wix setup here:

You can use the candle.exe and light.exe command line tools directly. This ignores the .wixproj file. This is what you are doing in your nant build script. To pass values for preprocessor variables like $(var.MyProject.TargetDir), use options like -dMyProject.TargetDir=c:\foo.
You can author a .wixproj file with votive (the visual studio add-on for wix). Like all visual studio project files, a wixproj file is actually a msbuild file which can be build with msbuild.exe. Variables like $(var.MyProject.TargetDir) are automatically set by the msbuild tasks for building wix setups if the correct project reference exists.

I recommend you build the wixproj file with the <msbuild> nant task. This ensures that your nant build does the same as when you build the setup manually from visual studio.