A large corporation lost a warehouse in a fire. They received a check for $200,000 from the insurance company, and the land was appraised at $50,000. They are considering building on office complex. It would cost $300,000 and take a year to build, but its expected value at the end of the year is $400,000. Of course, the capital market offers trading in securities with similar risk profiles that have an expected rate of return of 7%. Which leads to the larger increase in net present value: building the office complex or investing the money in the securities with similar risk profiles?

A large corporation lost a warehouse in a fire. They received a check for $200,000 from the insurance company, and the land was appraised at $50,000. They are considering building on office complex. It would cost $300,000 and take a year to build, but its expected value at the end of the year is $400,000. Of course, the capital market offers trading in securities with similar risk profiles that have an expected rate of return of 7%. Which leads to the larger increase in net present value: building the office complex or investing the money in the securities with similar risk profiles?

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter7: Valuation Of Stocks And Corporations

Section: Chapter Questions

Problem 1aM

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