Acme Industries is considering several ideas for expanding its scope of operations. It is planning to open an office in California to tap the Western market. Such an office would require an initial investment of $3.4 million and annual cash operating expenses of $750,000. The office, however, would generate a contribution of $1.6 million per year before considering operating expenses. Acme expects to depreciate (using a straight-line basis) the assets over an eight-year period. At the end of eight years, Acme expects to sell the California office for $400,000. Acme pays taxes at the rate of 30% of income and uses a discount rate of 10% on its capital projects.

Required:
a. Calculate the net present value (NPV) and the internal rate of return (IRR) for the California office. Based on these criteria, should Acme open the office in California?
b. What would be the payback period for this project?