Centaur Corporation is considering the purchase of an annex to one of its buildings. The annex will cost $10,000,000. Centaur estimates that the building annex will save it $900,000 in rent in its first year, and that the rent savings will increase by $50,000 each year that they occupy it. Centaur also estimates that they will incur $100,000 in maintenance expenses the first year that they occupy the building annex, and that the maintenance expenses will increase by $10,000 each year that they occupy it.
Centaur expects to occupy the annex for ten years, after which time they expect to sell the annex for $5,000,000. (They actually intend to sell the current building as well as the annex, but the potential sale of the current building is irrelevant.)
Centaur would finance the construction of the annex by borrowing the money. A bank has agreed to loan them the money at an annual interest rate of 6 percent (compounded annually).
Required: What are the net present value (NPV) and internal rate of return (IRR) of this construction project?