Question

A printed circuit board manufacturer will construct a new plant. The potential sites have the following estimates of income and cost. A plant on Site A would cost $30.2 million​ (mil) to​ build, produce $30.8 ​mil/year in​ revenues, ​$22.7 mil/year in​ expenses, and last 15 years. At Site B construction will cost $34.7 mil with $35.6 mil of revenues per​ year, $26.4 mil/year in expenses and will also last 15 years. Use the internal rate of return to determine which site should be selected. The MARR is 21% per year.

Which alternative would you choose as a base​ one? Site A or Site B

Analyze the difference between the base alternative and the​ second-choice alternative.

IRR Option A - Option B = ______​%. ​(Round to one decimal​ place.)

Which alternative should be​ selected? Site A or Site B

Answer 1

MARR = 21%

Plant A initial cost = 30.2 m

Plant A Annual Net revenue = 30.8 m - 22.7m = 8.1 m

Plant B initial cost = 34.7 m

Plant B Annual Net revenue = 35.6 m - 26.4m = 9.2 m

t = 15 yrs

Base alternative is A, as it has lower initial cost

Using IRR function in excel

Year	Alternative A	Alternative B	B-A
0	-30200000	-34700000	-4500000
1	8100000	9200000	1100000
2	8100000	9200000	1100000
3	8100000	9200000	1100000
4	8100000	9200000	1100000
5	8100000	9200000	1100000
6	8100000	9200000	1100000
7	8100000	9200000	1100000
8	8100000	9200000	1100000
9	8100000	9200000	1100000
10	8100000	9200000	1100000
11	8100000	9200000	1100000
12	8100000	9200000	1100000
13	8100000	9200000	1100000
14	8100000	9200000	1100000
15	8100000	9200000	1100000
		IRR	23.4%

As IRR is greater than MARR, alternative B should be selected