Question

Please answer both questions, I would appreciate it greatly! (:

1. Consider the following project and its cash flow: Investment cost Expected life Market (salvage) value Annual receipts Annual expense $10,000 5 years $1,000 $8,000 $4,000 A negative market value means that there is a net cost to dispose of an asset. a. Determine its PW and FW with MARR 15% per year. Is the project acceptable? b. What is the IRR? Is the project acceptable? Your firm is considering the purchase of an old office building with an estimated re service life of 25 years. The tenants have recently signed long-term leases, which lead you to believe that the current rental income of $150,000 per year will remain constant for the first 5 years. Then the rental income will increase by 10% for every 5-year interval over the remaining asset life. For example, the annual rental income would be $165,000 for year 6 through 10, $181,500 for year 11 through 15, $199,650 for year 16 through 20, and $219,615 for year 21 through 25. You estimate that operating expenses, including income taxes, will be $45,000 for the first year, and will increase by $3,000 each year thereafter. You estimate that razing the building and selling the lot will realize a net amount of $50,000 at the end of the 25-year period. For a MARR-12% per year what would be the maximum amount you would pay for the building and lot at the present time? 2.

If you cannot see the picture, I have transcribed below:

1.

Consider the following project and its cash flow:

Investment cost $10,000

Expected life 5 years

Market (salvage) value* -$1,000

Annual receipts $8,000

Annual expense -$4,000

* A negative market value means that there is a net cost to dispose of an asset.

a. Determine its PW and FW with MARR 15% per year. Is the project acceptable?

b. What is the IRR? Is the project acceptable?

2.

Your firm is considering the purchase of an old office building with an estimated remaining service life of 25 years. The tenants have recently signed long-term leases, which lead you to believe that the current rental income of $150,000 per year will remain constant for the first 5 years. Then the rental income will increase by 10% for every 5-year interval over the remaining asset life. For example, the annual rental income would be $165,000 for year 6 through 10, $181,500 for year 11 through 15, $199,650 for year 16 through 20, and $219,615 for year 21 through 25. You estimate that operating expenses, including income taxes, will be $45,000 for the first year, and will increase by $3,000 each year thereafter. You estimate that razing the building and selling the lot will realize a net amount of $50,000 at the end of the 25-year period. For a MARR = 12% per year what would be the maximum amount you would pay for the building and lot at the present time?

Answer 1

1) Pw 0.5%,-1 0.000+ ( 8.000-4000) (P A l 5%.5)-1 .000 ( P F. 1 5%. 5) 10.000 + 4000( 3.3522)-1.000 (0.4972,-2911.6 FW ( 1 5%,--10.000 (F P. 1 500, 5) + ( 8.000-4000) (FA. 1500. 5)-1,000 ー-10.000 (2.0114) + 4000(6.7424)-1.000= 5855.6 AW (1 5%) = 8.000-4000-[ 10.000( A P. l 5%. 5 )-(- 1 000) (A F15%.5 )] -4000-[10,000(0.2983)-1,000(0.1483)]-868 70 MARR, the project is acceptable. Since the IRR

Salvage value at Expense the end of PV Factor @12% Discounted NAB (S) (C)x(D) 2 Year Income (S)|(S) life NAB (S) 11,50,000 21,50,000 31,50,000 41,50,000 51,50,000 61,65,000 71,65,000 81,65,000 91,65,000 101,65,000 111,81,500 121,81,500 131,81,500 141,81,500 151,81,500 45,000 48,000 51,000 54,000 57,000 60,000 63,000 66,000 69,000 72,000 75,000 78,000 81,000 84,000 87,000 1,05,000 1,02,000 99,000 96,000 93,000 1,05,000 1,02,000 99,000 96,000 93,000 1,06,500 1,03,500 1,00,500 97,500 94,500 0.8929 0.7972 0.7118 0.6355 0.5674 0.5066 0.4523 0.4039 0.3606 0.322 0.2875 0.2567 0.2292 0.2046 0.1827 93,755 81,314 70,468 61,008 52,768 53,193 46,135 39,986 34,618 29,946 30,619 26,568 23,035 19,949 17,265 4 6 10 12 13 14 15 16 17 18

0.1631 0.1456 0.13 0.1161 0.1037 0.0926 0.0826 0.0738 0.0659 0.0588 90,000 93,000 96,000 99,000 161,99,650 171,99,650 181,99,650 191,99,650 201,99,6501,02,000 212,19,6151,05,000 22 2,19,6151,08,000 232,19,6151,11,000 242,19,6151,14,000 252,69,6151,17,000 1,09,650 1,06,650 1,03,650 1,00,650 97,650 1,14,615 1,11,615 1,08,615 1,05,615 1,02,615 17,884 15,528 13,475 11,685 10,126 10,613 9,219 8,016 6,960 6,034 7,90,167 19 20 21 23 24 25 26 27 28 29 50,000 Present Worth (S)