. Improving Investment Returns. For many years Emilio Perez has been successful in the retail garment industry in Nogales, Mexico. Recently he has learned of an opportunity to purchase a two-story modern building for M \(\$ 750,000\). He believes that he can operate successfully by using only one of the two floors. At the present time, his business is operating in an older building where he uses three floors. This has sales and production constraints, he admits.

With uncertainties about inflation and interest rates, he would hesitate to invest unless he could obtain a discounted rate of return of at least 15 percent. Yet, he estimates that the annual returns from his business after income tax would probably increase by \(\mathrm{M} \$ 150,000\) for each of the next ten years if he moved. This investment opportunity does not appear that good to him, and he is inclined to continue the current arrangements.

His daughter, who has recently graduated from medical school, disagrees with his position: "You forget that this area is growing. We have no professional building; and I know of several doctors, dentists, and attorneys who would be happy to have offices on the second floor if you did some remodeling. I already have estimates and find that you can have the second floor remodeled for \(\mathrm{M} \$ 100,000\). The offices should yield annual aftertax rental income of M \(\$ 40,000\)."

Required:

1. From the data given, what is the approximate IRR on the building itself?

2. What is the approximate IRR on the building and the remodeling investment together?

3. Comment on the worthiness of the incremental investment.