10 Nov P r oper Cash Fl o ws. Co
P r oper Cash Fl o ws. Conference Services Inc. has leased a large office building for $4 mil- lion per year. The building is larger than the company needs: two of the building’s eight sto- ries are almost empty. A manager wants to expand one of her projects, but this will require using one of the empty floors. In calculating the net present value of the proposed expan- sion, upper management allocates one-eighth of $4 million of building rental costs (i.e., $.5 million) to the project expansion, reasoning that the project will use one-eighth of the build- ing’s capacity. a. Is this a reasonable procedure for purposes of calculating NPV? b. Can you suggest a better way to assess a cost of the office space used by the project?
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