Question
a. Ms. Duncan had just finished reviewing the spreadsheet with her financial analysis of the project when another confidential envelope arrived from Dummonts CEO. It
a. Ms. Duncan had just finished reviewing the spreadsheet with her financial analysis of the project when another confidential envelope arrived from Dummonts CEO. It contained a firm offer from a Halifax real estate developer to purchase Dummonts land and plant TODAY for $1.5 million in cash (consider that the plant and land can still be sold at the end of year 5 for only $600,000). Should Ms. Duncan recommend submitting the bid to the Forces at the proposed 3 price of $30 per yard anyway? (Hint: The opportunity cost of $1.5 million should be accounted for at the beginning of the project.)
b. Now suppose Dummont has a firm offer from the real estate developer to purchase Dummonts land and plant TODAY for $ 1 million OR in 5 years for $1.5 million. The CEO also considers that 12% return is not correctly reflecting the firms cost of capital (i.e., discount rate), so Ms. Duncan has estimated that the firms cost of capital (i.e., discount rate) is actually 15% rather than 12%. Should the company proceed with the project considering the new discount rate and the real estate offers? (Hint: $1 million and $1.5 million are the opportunity cost and salvage value respectively.)
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