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Suppose a firm owns a warehouse that it originally purchased for $150,000 using a loan that...

Suppose a firm owns a warehouse that it originally purchased for $150,000 using a loan that it currently is paying at $600 per month. The firm is considering a project in which it needs the use of a warehouse and is considering using this warehouse for the project. The firm has determined that the project is acceptable if warehouse costs are $500 per month. The firm also knows that similar warehouses rent for $450 per month (though none are available at the current time to rent). Should the firm undertake the project? Explain why or why not.

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Answer #1

The firm should undertake the project, because it will help the firm to recover the investment. If the project is not undertaken, then also, the firm has to pay the $600 per month as a fixed cost. With undertaking of the project, $500 per month will be allocated towards the expenses associated with the warehouse. This $500 per month will be used to recover the investments done towards the purchase of warehouse that is not being used till now. So, $500 towards the cost of warehouse, will be used as a savings if project is undertaken.

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