Is a reasonable procedure for purposes of calculating npv

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Cash Flows. Conference Services Inc. has leased a large office building for $4 million per year. The building is larger than the company needs; two of the building's eight stories 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 expansion, senior manage-ment 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 building's capacity.

Problem a. Is this a reasonable procedure for purposes of calculating NPV?

Problem b. Can you suggest a better way to assess a cost of the office space used by the project?

Reference no: EM132637967

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