A Firm Must Decide Between Constructing A New Facility Or Renting A Comparable Office Space There Are Two Random Outcom 1 (138.65 KiB) Viewed 45 times
A firm must decide between constructing a new facility or renting a comparable office space. There are two random outcomes for acquiring space, as shown in Figure 1. Each would accommodate the expected growth of this company over the next 10 years. The option of constructing a new facility is also defined in Figure 1. An initial facility could be constructed within the costs shown. In five years, additional space will be required. At that time, there will be an option to build an office addition or rent space for the additional space requirements. The probabilities for each alternative are shown in Figure 1. MARR is 10% per year. An NPV analysis is to be conducted on the alternatives. Which course of action should be recommended?
O&M = £900k/year (10 years) 0.55 R O&M = £700k/year (10 years) 0.45 Investment = - £25k (now) BA 1 PV = -£5,111.14 2 Investment = -£10.5 mill (now) + £17 mill (EOY10) PV = -£4,119.06k RA O&M = £150k/year (10 years) B-Build New Facility R-Rent New Facility BA - Build Addition RA - Rent Addition O&M-Operating & Maintenance Costs k-thousands mil - millions B O&M = £200k/year (first 5 years) 0.6 O&M = £300k/year (10 years) 0.2 Figure 1: Decision Tree Diagram for Question 2
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