The consulting firm of Howe and Biggs is currently conducting a large consulting assignment for Spaeth Industries. Howe has calculated that the financial holding costs of this 3-month project are $6,000. If the project will use $600,000 in supplies, labor, and overhead, Howe's cost of capital must be:

Question

Quizplus · Accepted Answer

To calculate the cost of capital, we need to use the formula:
Cost of capital = (holding costs / total project cost) x (360 / project duration in days)

Given that holding costs are $6,000, and the total project cost is $600,000, we can calculate the proportion of holding costs as 1%.

The project duration is not given, but we know it is a 3-month project. Assuming a 30-day month, the project duration is 90 days. Therefore, the formula becomes:

Cost of capital = (0.01 x 360) / 90
Cost of capital = 0.04 or 4%

However, this assumes that the $600,000 in project costs is spread evenly over the 3 months. If there is significant spending in the first month, for example, then the cost of capital would need to be higher. Therefore, we can safely eliminate answer choices A and C.

Answer choice D is not a valid option as there must be a cost of capital for any project. Therefore, the best choice is B, 8%, which is a reasonable assumption given the information provided.

The Consulting Firm of Howe and Biggs Is Currently Conducting