Option $1$: The hospital is considering two mutually exclusive projects listed in no specific order. The first option is to not build the radiology center but make an investment in updating its radiology center by remodeling the area and acquiring a few new imaging machines. The total project will cost $$3$ million dollars and based on technological advances, a useful life $10$ years with no salvage value using straight$-$line depreciation. For simplicity, assume MACRS does not apply and straight$-$line is used. Also, recall that depreciation is not a cash$-$flow item but a non$-$cash flow expense that includes a tax deduction $($tax benefit$).$

The combined federal, state, and local tax rate on its income is $26\%.$ This rate is not expected to change during the investment period. The projected pre$-$tax operating cash inflows is expected to be $$700,000$ for each of the ten years. Since this is an average$-$risk project, the WACC of $13\%$ will be used.

Option $2$: The second option is to build a state$-$of$-$the$-$art radiology center that will draw patients needing diagnostic testing and evaluation throughout the country. This option will require a significant investment of $$25,000,000.$ This investment is considered higher risk and has a hurdle rate of $15\%.$ The combined tax rate is $26\%.$ The useful life is $15$ years with no salvage $($assume MACRS does not apply$).$ The projected pre$-$tax operating cash inflows is expected to be $$8,000,000$ for each of the fifteen years.

Calculate the internal rate of return $($IRR$)$ for each option $($as calculated in Req. $4),$ which option would be a better investment choice based on its IRR. Explain your answer and show your calculations.

Explain the benefits and limitations of using the IRR method $($pg$.489)$ to choose an investment choice.