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, has a 100,000 40-year estimated life. The current market value is 80,000years 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 or 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 $50,000annually.
Assume that
o (1)
all cash flows occur at year end,
o (2)
the company uses straight-line depreciation,
o (3)
the buildings will have a residual value equal to 10 percent of their purchase price, and
o (4)
the minimum rate of return is 14%
(Hint: Use Tables 1 and 2 in Appendix C.)
REQUIRED
2. Compute the present value of future cash flows from the old building.
Answer
Check Figure: Present value of future cash flows:
3. What will the net present value of cash flows be if the company purchases the new building?
4. ACCOUNTING CONNECTION Should the company keep the old building or purchase the new one? Why?