The B&E Cooling Technology Company, a maker of automobile air-conditioners, faces a three-year deadline to phase out the traditional chilling technique, which uses chlorofluorocarbons (CFCs)- a family of refrigerant chemicals believed to attack the earth's protective ozone layer. B&E has been pursuing other means of cooling and refrigeration. As a near-term solution, the engineers recommend a cold technology known as an absorption chiller, which uses plain water as a refrigerant and semiconductors that cool down when charged with electricity. B&E is considering two options.
• Option 1. Retrofit the plant now to adapt the absorption chiller and continue to be a market leader in cooling technology. Because of untested technology on a large scale, it may cost more to operate the new facility while personnel are learning the new system.
• Option 2. Defer the retrofitting until the federal deadline, which is three years away. With expected improvement in cooling technology and technical know-how, the retrofitting cost will be cheaper. However, there will be tough market competition, and the revenue would be less than that of option 1.
The financial data for the two options are as given in Table ST7.3.
TABLE ST7.3


(a) What assumptions must be made to compare these two options?
(b) If B&E's MARR is 15%, which option is the better choice based on the IRR criterion?