4) Francos athletic club is planning an expansion. The owner is either going to build a completely new building or just add on to the existing facility. A new building will cost $10 million, but it is expected to increase revenues by $2 million (before taxes) per year for ten years. An add-on to the current facility will only cost $500,000, but projections are that it will lead to an increase in revenues of only $150,000 (before taxes) per year for ten years. The capital outlay for either choice will be depreciated on a straight-line basis over the ten-year life of the project. Cash flows from depreciation tax savings should be considered to have the same risk as other cash flows. Francos Athletic Club has a marginal tax rate of 21% and a cost of capital of 10%. Find the IRR of each project, the incremental IRR, and determine which type of an expansion to recommend to the owner.

3. The New Orleans Mosquito Control Corporation (NOMCC) has hired you as a consultant to evaluate the NPV of their proposed frog ranch. NOMCC plans to breed long-tongue frogs and sell them as ecologically desirable mosquito-control mechanisms in the hopes of eliminating the West Nile Virus. They anticipate that the business will continue in perpetuity. Following negligible start-up costs, NOMCC will incur the following nominal cash flows at the end of the year. Revenues Labor costs Other costs $150,000 75,000 20,000 The company will lease machinery from a firm for $10,000 per year. (The lease payment starts at the end of year 1.) The payments of the lease are fixed in nominal terms. Sales will increase at 5 percent per year in real terms. Labor costs will increase at 3 percent per year in real terms. Other costs will increase at 1 percent per year in real terms. The rate bf inflation is expected to be 1.5 percent next year. The real cost of capital for revenues and costs is 10 percent. The lease payments are risk-free: therefore, they must be discounted at the risk-free rate. The real risk-free rate is 2 percent. There are no taxes. All cash flows occur at year-end. What is the NPV of NOMCC's proposed frog ranch today