CFA Practice Question

CFA Practice Question

A firm is considering where to locate its factory. One alternative is an old warehouse it had bought for $1 million 3 years back with a loan that required it to pay a yearly rate of return of 8%. If the firm uses the warehouse, it will require $150,000 in repairs. If it does not use the warehouse, it can sell it to another firm for $600,000. Assume no taxes. What is the correct cost of the warehouse for calculating NPV?
A. $750,000.
B. $1 million.
C. $1.2597 million.
Explanation: The price paid earlier is a 'sunk cost'. The true cost is the opportunity cost ($600,000) and repairs ($150,000).

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