Financial analysis of the project

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a. Ms. Duncan had just finished reviewing the spreadsheet with her financial analysis of the project when another confidential envelope arrived from Dummont's CEO. It contained a firm offer from a Halifax real estate developer to purchase Dummont's land and plant TODAY for $1.5 million in cash (consider that the plant and land can still be sold at the end of year 5 for only $600,000). Should Ms. Duncan recommend submitting the bid to the Forces at the proposed 3 price of $30 per yard anyway? (Hint: The opportunity cost of $1.5 million should be accounted for at the beginning of the project.)

b. Now suppose Dummont has a firm offer from the real estate developer to purchase Dummont's land and plant TODAY for $ 1 million OR in 5 years for $1.5 million. The CEO also considers that 12% return is not correctly reflecting the firm's cost of capital (i.e., discount rate), so Ms. Duncan has estimated that the firm's cost of capital (i.e., discount rate) is actually 15% rather than 12%. Should the company proceed with the project considering the new discount rate and the real estate offers? (Hint: $1 million and $1.5 million are the opportunity cost and salvage value respectively.)

Reference no: EM133060901

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