A firm has an office building that will earn cash flows of $20 million per year at the end of each year (for perpetuity) if left unchanged. It can tear down the building and put up a new building at a cost of $100 million. The building will have an infinite life. There are zero taxes. The firm uses a 0.10 discount rate. The land can be sold for $42 million, and it is expected that this price will stay constant. The depreciated cost (book value) of the present building is $45 million (exclusive of land), and the replacement cost is $86 million.

A. What annual (constant) cash flows have to be achieved for the firms to replace the old and build the new? Assume a perpetual life and constant cash flow.

B. How (if at all) does the answer to (a) change if the firm can sell now for $250 million (both building and land)?