You manage at Tesla. Tesla is considering the development of an entirely new electric vehicle. The engineers recommend two mutually exclusive models: The Al model and the A2 model. The investment outlay for the A 1 model has been computed to be $480,000, and the outlay for the A2 model has been computed to be $400,000. This initial outlay is depreciated on a straight line basis over a 20-yr period (no salvage value). The firm's cost of capital is 14%.

The engineering group has estimated that the annual operating costs would be $480,000 for Al and $250,000 for A2. Furthermore, it is estimated that the incremental annual sales would be $800,000 for Al and S500,000 for A2. These figures are expected to remain constant over the next 20 years and are already adjusted for inflation. The corporate tax rate is 50%. Your management team must make a recommendation to senior management about which model should be adopted.

1: Which model do you recommend (Al or A2)? Justify your choice by including an analysis of the IRR.