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 $31.6 mil/year in revenues, $22.7 mil/year in expenses, and last 18 years. At Site B construction will cost $34.5 mil with $35.2 mil of revenues per year, $25.2 mil/year in expenses and will also last 18 years. Use the internal rate of return to determine which site should be selected. The MARR is 25% per year.

Answer 1

For each Site,

Net Cash flow = Annual revenue - Annual Cost

Internal Rate of Return (IRR) of each site is computed using Excel IRR function as follows.

SITE - A					SITE - B
Year	Revenue ($M)	Cost ($M)	Net Cash Flow ($M)		Year	Revenue ($M)	Cost ($M)	Net Cash Flow ($M)
0		30.2	-30.2		0		34.5	-34.5
1	31.6	22.7	8.9		1	35.2	25.2	10
2	31.6	22.7	8.9		2	35.2	25.2	10
3	31.6	22.7	8.9		3	35.2	25.2	10
4	31.6	22.7	8.9		4	35.2	25.2	10
5	31.6	22.7	8.9		5	35.2	25.2	10
6	31.6	22.7	8.9		6	35.2	25.2	10
7	31.6	22.7	8.9		7	35.2	25.2	10
8	31.6	22.7	8.9		8	35.2	25.2	10
9	31.6	22.7	8.9		9	35.2	25.2	10
10	31.6	22.7	8.9		10	35.2	25.2	10
11	31.6	22.7	8.9		11	35.2	25.2	10
12	31.6	22.7	8.9		12	35.2	25.2	10
13	31.6	22.7	8.9		13	35.2	25.2	10
14	31.6	22.7	8.9		14	35.2	25.2	10
15	31.6	22.7	8.9		15	35.2	25.2	10
16	31.6	22.7	8.9		16	35.2	25.2	10
17	31.6	22.7	8.9		17	35.2	25.2	10
18	31.6	22.7	8.9		18	35.2	25.2	10
		IRR =	29.18%				IRR =	28.68%

Since both Sites have IRR higher than MARR, but Site A has higher IRR than Site B, Site A should be selected.