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Answer:
Site B should be chosen based on the IRR criterion
Explanation:
Please check the attached image for the complete question
The internal rate of return is the discount rate that equates the after tax cash flows from an investment to the amount invested.
When comparing projects, the project with the highest IRR should be chosen.
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Solution:
NPV is calculated as:
NPV =
Initial investment = $16,500,000
Depreciation table:
Recovery Year 7-Year % Depreciation Booked Asset Book
Value at the end of Year
1 14.29 $ 3,029,480 $ 18,170,520
2 24.49 $ 5,191,880 $ 12,978,640
3 17.49 $ 3,707,880 $ 9,270,760
4 12.49 $ 2,647,880 $ 6,622,880
5 8.93 $ 1,893,160 $ 4,729,720
6 8.92 $ 1,891,040 $ 2,838,680
7 8.93 $ 1,893,160 $ 945,520
8 4.46 $ 945,520 $ 0
Book value at the end of 5 years = $ 4 , 729 , 720
After tax salvage value = 25 % ∗ $ 21 , 200 , 000 − ( 25 % ∗ $ 21,200,000) - $4,729,720 ) * 30%
= $ 5, 128 ,916
Sales table:
Year Unit Sales
1 83,000
2 96,000
3 1,10,000
4 1,05,000
5 86,000
We calculate the free cash flow of the project : ( Check the attachment )
1)
Using NPV formula
NPV = − $ 7 , 328 , 810.58
2)
IRR is the discount rate (R) when the NPV of the project will be equal to zero.
Solving the equation (1) for R we get:
R = 3.93%
So IRR of the project = 3.93%
