Question
ABC Inc. is deciding whether to buy a new building. The building will increase cash flows by $5,000,000 per year. The building has a 10-year
ABC Inc. is deciding whether to buy a new building. The building will increase cash flows by $5,000,000 per year. The building has a 10-year life and will be obsolete 10 years from today. The building is current priced at $15 million. The cost of the building will decline by $2,500,000 per year until it reaches 5 million, where it remains until it is obsolete. The required rate of return is 10%.
Assuming ABC is willing to wait and risk not being able to acquire the build, how many years from today should they wait to purchase the building to maximize the NPV?
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