Question

Quantum Logistics, Inc., a wholesale distributor, is considering constructing a new warehouse to serve the southeastern geographic region near the South Carolina-Georgia border. There are three cities being
considered. After site visits and a budget analysis, the expected income and costs associated with locating in each of the cities have been determined. The life of the warehouse is expected to be 12 years, and MARR is 15 percent / year. Based on an internal rate of return analysis, which city should be
recommended?

                        Initial Cost                   Net Annual Income

Clemson:    $1,260,000                    $480,000

Augusta:     $1,000,000                    $410,000

Beaufort:    $1,620,000                    $520,000

Answer 1

The IRR can be calculated in Excel using the formula -IRR(CF0,CF1,...CFn) Write down the given cash flow series for the three cities and find out their IRR using the above- mentioned formula: Year Clemson Beaufort Augusta 0 -1260000 -1000000 -1620000 480000 410000 520000 1 2 480000 410000 520000 480000 3 410000 520000 480000 410000 520000 4 480000 410000 520000 5 6 480000 410000 520000 480000 410000 520000 7 8 480000 410000 520000 480000 410000 520000 10 480000 410000 520000 410000 480000 520000 11 12 480000 410000 520000 IRR > 37.24% 40.29% 30.82% Thus, IRR(Clemson) 37.24% IRR(Augusta) 40.29% IRR(Beaufort) 30.82% Since IRR of Augusta is the highest, building of city of Augusta is recommended.