Maurice Tutor

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    Argosy University/ Phoniex University/
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Category > Accounting Posted 06 Aug 2017 My Price 11.00

Sonja and Sons, Inc.

Net Present Value Method

Sonja and Sons, Inc., owns and operates a group of apartment buildings. Management wants to sell one of its older four-family buildings and buy a new building. The old building, which was purchased 25 years ago for $100,000, has a 40-year estimated life. The current market value is $80,000, and if it is sold, the cash inflow will be $67,675. Annual net cash inflows from the old building are expected to average $16,000 for the remainder of its estimated useful life.

The new building will cost $300,000. It has an estimated useful life of 25 years. Net cash inflows are expected to be $50,000 annually.

Assume that (1) all cash flows occur at year end, (2) the company uses straight-line depreciation, (3) the buildings will have a residual value equal to 10 percent of their purchase price, and (4) the minimum rate of return is 14 percent. Use Table 1 and Table 2.

1. Compute the present value of future cash flows from the old building.
$

2. What will the net present value of cash flows be if the company purchases the new building?
$

3. Should the company keep the old building or purchase the new one?
SelectPurchase new buildingKeep the old buildingItem 3

Why?
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Answers

Maurice Tutor
(5)
Status NEW Posted 06 Aug 2017 12:08 AM My Price 11.00

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