Question

1) AERO spent and expensed $60,000 on research related to the project last year.  Do you include the research expense as part of the outflows when calculating NPV, IRR and Payback Period?  Yes or No

2) The company plans to use the building that it owns to house the project. The building could be rented out for 1/2 million dollars per year after subtracting taxes and real estate commissions. Is the 1/2 million dollars a cost to the firm?

3)
For Aero, does the use of the building for the project raise NPV or lower NPV.  Yes/No & why?

Answer 1

Question 1:

No

Amount spent and expensed on research related to the project last year is Sunk cost. Sunk cost is irrelavant in decision making and is not included as outflows when calculating NPV, IRR and Payback Period

Question 2:

Yes

1/2 milliom dollars is cost to the firm because it is the Opportunity Cost. If project is not undertaken the rental amount will be received hence this is considered in evaluation and it is the cost to the firm

Question 3:

Yes

Use of building for the project lower the NPV. Hence this will increase the initial Cash outflow and lower the NPV