The XYZ company is planning to put up its own building. Two proposals being considered are:...
The XYZ company is planning to put up its own building. Two
proposals being considered are:
a. The construction of the building now to cost P400,000.
b. The construction of a smaller building now to cost P300,000 and
at the end of 5 years, an extension to
be added to cost P200,000.
By how much is proposal B more economical than proposal A if
interest rate is 20% and depreciation is to be
neglected?
Homework Answers
a) in case construction of own building the PV (Present Value) of cash outflow = 5,00,000 &
b) in case of construction of small building the PV of cash outflow is =3,80,400 (3,00,000+(2,00,000*20%,5th year))
as in option b cash outflow is less, company has to go for construction of small building and at the end of 5 years, an extension to be added at cost 200,000.
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