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 straightline 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 in the appendix on present value tables.
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?
________a