A scuba diving school has been given the opportunity to purchase a sunken shipwreck for just $25,000, giving trainee scuba divers the opportunity to navigate through the ship as part of their training. They are now considering a project to set up a new training course built around access to the ship. If the course is unlikely to be profitable, the sunken ship can be sold to another scuba diving school that is interested in acquiring it.

How would you treat the cost of the ship for the purposes of the NPV analysis for the new training course?

A oil company is considering an off-shore drilling project in Bass Straight, for which they require an environmental impact study which must be approved by the Federal Government before drilling can commence. The consulting firm that the oil company usually uses has gone out of business, so the company approached a new consulting firm for a quote. This type of study would normally cost $8,000,but in order to attract the potential new client, the consulting firm quoted half the normal price, and therefore gave the oil company an opportunity to get the study done for a cost of just $4,000. The consulting firm completed the study, the Federal Government gave approval for the project, and the oil company is now deciding whether or not this is a positive-NPV project.

How would you treat the cost of the environmental impact study for the purposes of the NPV analysis for the drilling operation?

Q1 A firm that manufacture repaper is considering a project to set up a logging operation. Wood pulp generated by the project- normally an unwanted by-product of a logging operation - is an input to the paper manufacturing process. This will save the company $330,000 in wood pulp purchases, but it will cost $60,000 more to transport the wood pulp to the paper factory than it would cost to dump it as waste.

 

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