Decision making regarding addition of new facilities for a business.
You are considering adding a new conference room to your hotel. If you do not 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 decide to invest in the conference room, your cash flows, including the investment cost and additional 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%, should you make the investment? What would be the maximum cost of capital you could afford in order to make the investment?