Conference Services Inc. has leased a large office building for $4 million per year. The building is

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Conference Services Inc. has leased a large office building for $4 million per year. The building is larger than the company needs; two of the building's eight stories are almost empty. A manager wants to expand one of her projects, but this will require using one of the empty floors. In calculating the net present value of the proposed expansion, senior management allocates one-eighth of $4 million of building rental costs (i.e., $.5 million) to the project expansion, reasoning that the project will use one-eighth of the building's capacity.
a. Is this a reasonable procedure for purposes of calculating NPV?
b. Can you suggest a better way to assess a cost of the office space used by the project?
Net Present Value
What is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at...
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Fundamentals of Corporate Finance

ISBN: 978-0078034640

7th edition

Authors: Richard Brealey, Stewart Myers, Alan Marcus

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