A.

Assume that Local University (LU) has experienced a decline in enrollment over the last several years. There is now excess capacity in the form of one dormitory and one classroom/office building. The President has convened a committee to explore options for these two facilities. For the classroom building, the committee identified the following alternatives:

a.Continue to use the building for the classes and office that exist currently;

b.Demolish the building and create a new green space; or

c.Enter into a long-term lease with Convenient Corporate Neighbor to use the space.

Consider option c. There are costs that will be incurred in Year 0 to prepare the building for CCN. There are costs that will be incurred in each year of the lease. There are costs that will be incurred when the lease terminates. Identify and briefly explain at least two items of cash flow for each time period. You donotneed to estimate the amounts, just identify and explain each one.

B.

Convenient Corporate Neighbor from above is considering modifications to one of its existing products. As part of the sensitivity analysis, they estimated the NPV of the modifications based on three different levels of unit cost: the base level, Base - 10% and Base + 10%. The sensitivity chart is below. Explain the meaning of the NPV values in the right-hand column.