Immuron need to upgrade their laboratory to expand their research and build their business. They are deciding on whether to renovate where they are or to build at a new location. The investment would be made on the 1st January 2022 and cash flows are expected to be received on the 1st January every year. Assuming a rate of return/discount rate/WACC of 8%.
Option 1 – Renovate current laboratory
Option one is a promising investment with a net present value (NPV) of $2,064,298.18 and an internal rate of return (IRR) of 27%. The payback period for this investment would be 4 years and 42.46 days.
Option 2 – Build new laboratory
Option 2 also appears as a positive investment with net present value (NPV) at $1,881,804.49 and an internal rate of return (IRR) of 10.5%. The payback period for Option 2 will be 8 years and 35.54 days.
Both investments are positive and will give good returns, however the results for Option 1 – Renovate current laboratory outshine Option 2 – Build new laboratory. Option one has a higher net present value and internal rate of return compared to option 2 and will be paid of in half the time. Although the option to build brings in a higher cashflow, the profits will still be more significant with a smaller cash flow by just renovating. Option 1 is the correct choice for Immuron.
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