Solar Inchas successfully produce solar panels for 5 years and would like to expand into batteries. They have two options to get into the battery production

Option 1: Joint Venture

In this option the company teams up with another party (Alternative Inc) to develop and produce batteries. Alternative Inc has already completed the required research. Solar Inc will be required to invest $10,000,000 into the joint venture. The business agreement with the other party lays out a joint project with a time limit of 5 years. Solar Inc had to pay $100,000 for consultant fees to obtain the right business partner.

Option 2: Buy the intellectual property and produce batteries themselves

This option would require Solar Inc to produce the battery from a factory premise they currently own and are presently leasing. The lease agreement has a remaining term of 10 years at an annual rental of $100,000. Solar Inc would be required to pay $50,000 compensation up front to the tenant for breaking the agreement early.

Purchase of the intellectual property together with the factory set up would cost $20,000,000 and they need to borrow 50% from the bank with an interest of 5% per year, interest-only loan.

New experts will be hired to run this operation.

The following information is for both options:

With the cost of capital of 12%

31a)

A.Calculate the ARR foroption 2only, you can use the following table format to fill your answer:(3 marks)

B.Calculate the net cash flows ofOption 2only, you can use the table below to fill in your answer:(4 marks)

C.The following is the calculation for NPV for both options, calculate EAA for each option and make a recommendation forSolar Inc.onwhich investment should be selected?(3 marks)