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Q1) You are thinking of adding new conference room to the hotel. If you don't invest in this new conference room, your cash flows will be as follows:

Years 0 1 2 3 4 5
Cash flows without investment 0 120 125 127 129 132

On the other hand, if you make a decision to invest in conference room, your cash flows, including investment cost and extra revenues, will be as follows:

Years 0 1 2 3 4 5
Cash flows with investment -60 135 138 150 150 148

If your cost of capital is 18%, must you make investment? What would be maximum cost of capital you could afford to make investment?

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  • Category:- Accounting Basics
  • Reference No.:- M919499

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