(NPV; project ranking; risk) Arkansas Financial Consultants is expanding opera¬ tions, and the firm’s president, Ms. Hillary Rose, is trying to make a decision about new office space. The following are Ms. Rose’s options:

If the Maple Commercial Plaza is purchased, the company will occupy all of the space. If High Tower is purchased, the extra space will be rented for $620,000 per year. If purchased, either building will be depreciated on a straight- line basis. For tax purposes, the buildings would be depreciated assuming a 25-year life. By purchasing either building, the company will save $210,000 an¬ nually in rental payments. All other costs of the two purchases (such as land cost) are expected to be the same. The firm’s tax rate is 40 percent.

a. Determine the before-tax net cash flows from each project for each year.

b. Determine the after-tax cash flows from each project for each year.

c. Determine the net present value for each project if the cost of capital for Arkansas Financial Consultants is 11 percent. Which purchase is the better investment based on the NPV method?

d. Ms. Rose is concerned about the ability to rent the excess space in High Tower for the 10-year period. To compute the NPV for that portion of the project’s cash flows, she has decided to use a discount rate of 20 percent to compensate for risk. Compute the NPV and determine which investment is more acceptable.

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Maple Commercial Plaza: High Tower: 5,000 square feet; cost, $800,000; useful life, 10 years; salvage, $400,000 20,000 square feet; cost, $3,400,000; useful life, 10 years; salvage, $1,500,000