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

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Definitions:

Factory Overhead

All indirect costs associated with manufacturing, excluding direct materials and direct labor, such as utilities, depreciation, and maintenance.

Direct Materials

Raw materials that can be directly attributed to the production of a product.

Direct Labor

The cost of wages for employees directly involved in the production or manufacturing of goods.

Cost of Goods Sold

The total cost associated with making or acquiring any goods sold during a specific period, including materials, labor, and overhead.