YOU ARE A FINANCIAL ANALYST FOR A COMPANY THAT IS CONSIDERING A NEW PROJECT. IF THE PROJECT IS ACCEPTED, IT WILL USE A FRACTION OF A STORAGE FACILITY THAT THE COMPANY ALREADY OWNS BUT CURRENTLY DOES NOT USE. THE PROJECT IS EXPECTED TO LAST 10 YEARS, AND THE ANNUAL DISCOUNT RATE IS 10% (COMPOUNDED ANNUALLY). YOU RESEARCH THE POSSIBILITIES, AND FIND THAT THE ENTIRE STORAGE FACILITY CAN BE SOLD FOR €100,000 AND A SMALLER (BUT BIG ENOUGH) FACILITY CAN BE ACQUIRED FOR €40,000. THE BOOK VALUE OF THE EXISTING FACILITY IS €60,000, AND BOTH THE EXISITING AND THE NEW FACILITIES (IF IT IS ACQUIRED) WOULD BE DEPRECIATED STRAIGHT LINE OVER 10 YEARS (DOWN TO A ZERO BOOK VALUE). THE CORPORATE TAX RATE IS 40%. DISCUSS WHAT IS THE OPPORTUNITY COST OF USING THE EXISTING STORAGE CAPACITY?

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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YOU ARE A FINANCIAL ANALYST FOR A COMPANY THAT IS
CONSIDERING A NEW PROJECT. IF THE PROJECT IS ACCEPTED, IT
WILL USE A FRACTION OF A STORAGE FACILITY THAT THE COMPANY
ALREADY OWNS BUT CURRENTLY DOES NOT USE. THE PROJECT IS
EXPECTED TO LAST 10 YEARS, AND THE ANNUAL DISCOUNT RATE IS
10% (COMPOUNDED ANNUALLY).
YOU RESEARCH THE POSSIBILITIES, AND FIND THAT THE ENTIRE
STORAGE FACILITY CAN BE SOLD FOR €100,000 AND A SMALLER
(BUT BIG ENOUGH) FACILITY CAN BE ACQUIRED FOR €40,000. THE
BOOK VALUE OF THE EXISTING FACILITY IS €60,000, AND BOTH THE
EXISITING AND THE NEW FACILITIES (IF IT IS ACQUIRED) WOULD BE
DEPRECIATED STRAIGHT LINE OVER 10 YEARS (DOWN TO A ZERO
BOOK VALUE). THE CORPORATE TAX RATE IS 40%. DISCUSS WHAT
IS THE
OPPORTUNITY COST OF USING THE EXISTING STORAGE CAPACITY?
Transcribed Image Text:YOU ARE A FINANCIAL ANALYST FOR A COMPANY THAT IS CONSIDERING A NEW PROJECT. IF THE PROJECT IS ACCEPTED, IT WILL USE A FRACTION OF A STORAGE FACILITY THAT THE COMPANY ALREADY OWNS BUT CURRENTLY DOES NOT USE. THE PROJECT IS EXPECTED TO LAST 10 YEARS, AND THE ANNUAL DISCOUNT RATE IS 10% (COMPOUNDED ANNUALLY). YOU RESEARCH THE POSSIBILITIES, AND FIND THAT THE ENTIRE STORAGE FACILITY CAN BE SOLD FOR €100,000 AND A SMALLER (BUT BIG ENOUGH) FACILITY CAN BE ACQUIRED FOR €40,000. THE BOOK VALUE OF THE EXISTING FACILITY IS €60,000, AND BOTH THE EXISITING AND THE NEW FACILITIES (IF IT IS ACQUIRED) WOULD BE DEPRECIATED STRAIGHT LINE OVER 10 YEARS (DOWN TO A ZERO BOOK VALUE). THE CORPORATE TAX RATE IS 40%. DISCUSS WHAT IS THE OPPORTUNITY COST OF USING THE EXISTING STORAGE CAPACITY?
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