An investor is computing the NPV of a project to determine whether or not to build a building. The investor has building plans produced by an architect that they will use to complete the building. The cost of these plans was $50,000. Should the $50,000 be included in the NPV calculation?

An investor is computing the NPV of a project to determine whether or not to build a building. The investor has building plans produced by an architect that they will use to complete the building. The cost of these plans was $50,000. Should the $50,000 be included in the NPV calculation?

Excel Applications for Accounting Principles

4th Edition

ISBN:9781111581565

Author:Gaylord N. Smith

Publisher:Gaylord N. Smith

Chapter26: Capital Budgeting (capbud)

Section: Chapter Questions

Problem 5R

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An investor is computing the NPV of a project to determine whether or not to build a building. The investor has building plans produced by an architect that they will use to complete the building. The cost of these plans was $50,000. Should the $50,000 be included in the NPV calculation? a) Yes, because the cost is related to the building. b) Yes, because it is an opportunity cost. c) Yes, because it is a fixed cost. d) No, because it is a sunk cost.
You are an employee of University Consultants, Ltd and have been given the following information. You are to present an investment analysis of a new small income-producing property for sale to a potential inventor. The asking price for the property is $8.5 million. You determine that the building was worth $7.225 million and could be depreciated over 39 years (use 1/39 per year). NOls are estimated to be $901,375 for year 1, $900,681 for year 2, $899,962 for year 3, $943,700 for year 4, $961,855 for year 5 and expected to increase by 3.16% thereafter. A fully amortizing 70 percent loan can be obtained at 10 percent interest for 20 years (total annual payments will be monthly payments *12). The property is expected to be sold for $9,360,805 after 5 years. Capital gains from price appreciation will be taxed at 15 percent and depreciation recapture will be taxed at 25 percent. Your ordinary income will be taxed at 35 percent. Assume that there is no selling cost and equity discount rate…
An organization is planning to put up its own building. Two proposals being considered are:A. The construction of the building now to cost P 400,000 B. The construction of a smaller building now to cost P300,000 and at the end of 5 years, anextension to be added to cost P 200,000.By how much is proposal B more economical than proposal A if interest rate is 20% and depreciation to be neglected?
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Chris is considering submitting a bit for the requested project, which involves building four houses per year for the next 3 years for a gated community. To complete such project, Chris would need to buy tools in the amount of $66,000, which would be completely depreciated over the project’s lifespan assuming straight-line depreciation, and such tools can be sold for $40,000 at the end of the project. Net working capital would be $16,000 over the life span of the project. The project’s variable cost would be $88,000 per house, and fixed cost would be $18,000 each year. The tax rate is 34% and Chris’ require rate of return is 14%. How much at minimum Chris should bid for each house? (Rounded to the nearest $500). A. $115,000 B. $98,500 C. $97,500 D. $96,500 E. $95,50
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Alexander Industries is considering purchasing an insurance policy for its new office building in St. Louis, Missouri. The policy has an annual cost of $10,000. If Alexander Industries doesn’t purchase the insurance and minor fire damage occurs, a cost of $100,000 is anticipated; the cost if major or total destruction occurs is $200,000. The costs, including the state-of-nature probabilities, are as follows: Using the expected value approach, what decision do you recommend? What lottery would you use to assess utilities? (Note: Because the data are costs, the best payoff is $0.) Assume that you found the following indifference probabilities for the lottery defined in part (b). What decision would you recommend? Do you favor using expected value or expected utility for this decision problem? Why?
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A developer must choose between two projects: In Project A, she would build an apartment building for $200 million immediately and then collect $300 million in rent next year. In Project B, she would build condominiums for $200 million immediately and spend another $300 million on construction next year. Then, in the year after that, she would collect $400 million in condo purchases. The discount rate is 25%. (a) Why are such projects commonly evaluated with the concept of present value? (b) Use present value to determine which project the developer should choose.
O Δ You work for a construction company that is considering a bid on a project to modernize the power grid in a country that is recovering from an earthquake. The cost to prepare the documentation that is necessary to submit the bid is $50,000. If a bid is submitted, you estimate that the project will be awarded with probability 0.5. The company's profit depends on the political situation prevalent in the country at the time of the project. Based on your experience, you conclude that with probability 0.2, the country would present favorable conditions and that the company would earn $240,000; with probability 0.7, the country would present stable conditions and the company would earn $140,000; and that with probability 0.1, the country would present unstable conditions and the company would lose 560,000. a. Would you recommend that the company bid on the project? b. Before your company bids on the project, what is the maximum amount you would pay for a forecast of the political…
An environmental consultant is considering the installation of a water storage tank for a client. The tank is estimated to have an initial cost of $426,000, and annual maintenance costs are estimated to be $6,400 per year. As an alternative, a holding pond can be provided a short distance away at an initial cost of $180,000 for the pond plus $90,000 for pumps and piping. Annual operating and maintenance costs for the pumps and holding pond are estimated to be $17,000. The planning horizon is 20 years, and at that time, neither alternative has any salvage value. Determine the preferred alternative based on a present worth analysis with a MARR of 20%/year.