Suppose a firm has two business options to choose from and has asked you, a Business Mathematics student, to help it make a decision. Option "A" requires an immediate cost of

$25,000

along with "upgrade costs" of

$4,000

in year 3 and

$7,500

in year 6. The returns from these investments begin in year 2 and are estimated to be

$2,000

per year for 3 years,

$4,000

per year for the next 3 years, and then

$8,000

in years 8 and 9, respectively. The only return in year 10 is a residual value of

$4,000.

Option "B" requires a cost today and in years 1 and 2 of

$7,000

and has estimated returns beginning in year 4 and ending in year 10 of

$5,000

per year. There will also be a residual value of

$2,000

in year 10. Using Excel's IRR function, find the Rate of Return for each of the two investment options available to the business based on the information given. Assume the business's expected return on investment is

15

percent. Which option would you recommend?