Question

The Canadian Government is considering building apartment units for its employees working in a foreign country. These employees are currently living in rental houses owned by local landlords. Currently, the government reimburses the employees their housing and transportation expenses. Two mutually exclusive locations for building the apartments, are shown in the following data:

	LOCATION A	LOCATION B
Original Investment by the Government	$8,000,000	$10,000,000
Estimated Annual Maintenance Expenses	$360,000	$350,000
Government Savings in annual Reimbursements	$1,960,000	$2,100,000

Assume the salvage value of the apartments to be 60% of the first investment, at the end of the 10th year. MARR is 10% and a 10-year study period is considered. DO nothing is not an alternative.

INSTRUCTIONS

1. Use Excel to compute the IRR for each alternative location.
2. Compute the IRR on the incremental investment, and make a recommendation regarding which location to select.   

Answer 1

Answer (a):

Location A IRR = 18.33%

Location B IRR = 15.59%

IRRs of both locations are higher than MARR of 10%. But Location A has higher IRR as compared to Location B.

Location A should be selected.

Above excel with 'show formula' is given in answer (2) below along with answer (2)

Answer 2:

IRR of increamental cash flow (Location B over Location A) = 4.20%.

This IRR on incremental investment is less than MARR.

Hence Location A should be selected.

The above 2 excels with 'show formula' is as below: