Please review problems 4, 8, and 10

The open the attached answer key for the practice set

Compare the answers for problems 4, 8, and 10.

Email me a listing of what problems you missed and why.

Please do not resubmit the assignment I will not find it and it will override what is there.

Explain in words why the problems (4, 8, and 10) were wrong.

For example"

"My answer was $3,250 and the correct answer is $1,300.I got this answer wrong because..."

Please do not provide answers in an excel spreadsheet.

The explanation in words and numbers are all that is needed.

Thank you.

THESE ANSWERS ARE WRONG. PLEASE EXPLAIN WHERE I WENT WRONG. 4.) We can remodel our existing building at a cost of $9.5 million, or build a new building at a cost of $11 million. The old building, after it is refurbished, would not be as efficient as the new one, and energy costs would therefore be $750,000 a year higher. The maintenance cost for the old building would be $450,000 per year and $420,000 for the new building. The salvage value for the new building would be $3.25 million after its 10 year life, while the salvage value for the old building would be $1,800,000 after its 8 year life. In addition, the new building would allow our company to project a \"Green Friendly\" image that would result in better recruitment of clients and personnel. It is estimated that this \"Green Friendly\" image would result in cost savings or increased cash flows (after tax) of $320,000 per year. If the new building is built, the old, the old building can be sold now for $850,000 in its present condition (please read pages 208-209 for the treatment of this cash flow). The required return for Boulder is 7 percent. Old building: Initial cost = 9,500,000 Incremental energy costs = 750,000 Maintenance costs = 450,000 Salvage value = 1,800,000 NPV of old building = -9,500,000 - (750,000 + 450,000) * (1-1/(1+7%)^8) / 7% + 1,800,000 / (1+7%)^8 = -15,617,942 Let equivalent annuity be X -15,617,942 = X * (1-1/(1+7%)^8) / 7% = X * 5.9713 Solving, we get X = Equivalent annuity = -2,615,501.77 New building: Initial cost = 11,000,000 Incremental energy costs = 0 Maintenance costs = 420,000 Salvage value = 3,250,000 Increased cash flow per year = 320,000 NPV of old building = -11,000,000 - (420,000 - 320,000) * (1-1/(1+7%)^10) / 7% + 3,250,000 / (1+7%)^10 = -10,050,223 Let equivalent annuity be Y So -10,050,223 = Y * (1-1/(1+7%)^10) / 7% = Y * 7.02358 Solving, we get Y = equivalent annuity = -1,430,925.65 So final answer is: NPV for old building is -15,617,942 and equivalent annuity is -2,615,501.77 NPV for new building is -10,050,223 and equivalent annuity is -1,430,925.65 As equivalent annuity for new building is lower (it has a lower cost per year as compared to the old building), we should choose the new building. 8.) Using a 6% required return, please compute the modified profitability index for the above investment__________________. Modified Profitability Index = PV of all positive cash flow/PV of all negative cash flow = 936, 255.43/(340,000+369432.48) = 1.3197 10.) Using a 6% required return, please compute the modified internal rate of return for the above investment (using the method described in the text - not the inappropriately preprogramed MIRR function in excel). To calculate MIRR First calculate PV of all ve cash flow = 340,000+(440,000/1.06^3) = (340,000+369432.48) = $70, 9432.49 Now, calculate Future Value (FV) of all + ve cash flow = = (140,000*1.06^5)+(211,000*1.06^4)+(195,000*1.06^2)+(321,000*1.06^1)+(315000) = = 1,328,096.219 MIRR = (FV/PV)^(1/6)-1 = = (1328096.219/709432.49)^(1/6)-1 = 11.02% Problem 5: Keep for 6 years Years Initial outlay Cash flows Salvage value Total cash flow Present value Net Present value PVIF Equivalent annuity Keep for 5 years Years Initial outlay Cash flows Salvage value Total cash flow Present value Net Present value PVIF Equivalent annuity Keep for 4 years Years Initial outlay Cash flows Salvage value Total cash flow Present value Net Present value PVIF Equivalent annuity Keep for 3 years Years Initial outlay Cash flows Salvage value Total cash flow Present value Net Present value PVIF Equivalent annuity Keep for 2 years Years Initial outlay Cash flows Salvage value Total cash flow Present value Net Present value PVIF Equivalent annuity $ $ 0 (165,000) 4 $ 42,000 $ 42,000 $ 42,000 (165,000) $ $206,858 $41,858 4.7665 42,000 $ 42,000 $ 42,000 $ 42,000 $ 0 (165,000) 1 2 3 42,000 $ 42,000 $ 42,000 $ 42,000 (165,000) $ $193,598 $28,598 4.1002 42,000 $ 42,000 $ 42,000 $ 42,000 6,975 $ 0 (165,000) 1 2 3 $ 42,000 $ 42,000 $ 42,000 (165,000) $ $172,779 $7,779 3.3872 42,000 $ 42,000 $ 42,000 $ 2,296 $ 0 (165,000) 1 2 $ 42,000 $ 42,000 $ (165,000) $ $151,036 ($13,964) 2.6243 42,000 $ 42,000 $ (5,321) $ 0 (165,000) 1 $ 42,000 (165,000) $ $141,445 ($23,555) 1.8080 42,000 3 $ $ $ 42,000 50,000 92,000 2 $ $ $ 42,000 75,000 117,000 $ (13,028) We would choose to abandon at the end of 6 years because it has the highest Equivalent Annuity. 5 $ $ $ 4 $ $ $ 3 42,000 8,782 $ 2 $ $ $ 1 4 $ $ $ 42,000 40,000 82,000 42,000 42,000 5 $ $ $ 42,000 30,000 72,000 6 $ $ $ 42,000 10,000 52,000