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 $11 million, but it is expected to increase revenues by $1.5 million (before taxes) per year for six years. An add-on to the current facility will only cost $5,000,000, but projections are that it will lead to an increase in revenues of only $900,000 (before taxes) per year for six years. The capital outlay for either choice will be depreciated on a 5-year MACRS class. Cash flows from depreciation tax savings should be considered having the same risk as other cash flows. Francos Athletic Club has a marginal tax rate of 34% and a cost of capital of 14%. Find the NPV and IRR of each project and determine which type of expansion to recommend to the owner.

5-year MACRS

0.2000

0.3200

0.1920

0.1152

0.1152

0.0576