Simion Inc Is Considering to Build a New Office in Clagary

question 39

Multiple Choice

Simion Inc is considering to build a new office in Clagary, which requires an immediate investment of $78 million and another $35 million in one year. Being near to the customers, it is expected a revenue of $2 million in Year one, $10 million in year 2 and then a steady stream of $15 million revenue each year in the subsequent 12 years. However, if they simply expand their current offices in Toronto and build a satellite office in Calgary, it requires an immediate investment of $30 million, another $15 million after one year, and $10 million after two years. Net returns are $expected to be $10 million per year from year 2 to year 14. Determine the net present value at 7.4%. Which option is preferable according to the net present value criterion?

• A) Build a new office with NPV of $21 million
• B) Expand current office with NPV of $9 million
• C) Build a new office with NPV of -$21 million
• D) Expanding current office is $30 million better in NPV compared to building a new office
• E) Either B or D