Question
Assume that Big-City Company (BCC) currently has about two-thirds of their staff members working from home most days. As a result, they need only about
- Assume that Big-City Company (BCC) currently has about two-thirds of their staff members working from home most days. As a result, they need only about one-half of the office space they lease. Unfortunately, their lease does not allow them to reduce the amount of space they pay for until the end of 2025. That means they have excess space for the time being based on their current work structure. The President has convened a group to consider alternatives. Their best ideas so far are:
- Continue to house their reduced staff in the entire space;
- Break the lease and incur a significant one-time cost; or
- Sub-lease half of the space (allowed under terms of the least) to Up-and-Coming Company (UCC).
Consider option c. There are costs that will be incurred in Year 0, which is 2021, to prepare the building for UCCs use. There are costs that will be incurred in each year of the sub-lease, 2022-2025. There are costs that will be incurred when the lease terminates. Identify and briefly explain at least two items of cash flow BCC will incur for each time period. You do not need to estimate the amounts, just identify and explain each one.
- Up-and-Coming Company from above is considering modifications to one of its existing products. As part of the sensitivity analysis, they estimated the NPV of the modifications based on three different levels of unit cost: the base level, Base 10% and Base + 10%. At this time, they consider the three cost levels to be equally likely. The sensitivity chart below is similar to the analysis in section 11-5 of the Chapter 11 Tool Kit on tab 2-Sens.
| Production |
|
Deviation | Cost/unit | NPV |
from Base | $1.95 | $14,296 |
-10% | $1.76 | $19,444 |
0% | $1.95 | $14,296 |
10% | $2.15 | $9,148 |
Explain the meaning of the NPV values in the right-hand column.
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