An oil company is considering changing the size of a small pump that is currently operational in wells in an oil field. If this pump is kept, it will extract 50% of the known crude-oil reserve in the first year of its operation and the remaining 50% in the second year. A pump larger than the current pump will cost $1.6 million, but it will extract 100% of the known reserve in the first year. The total oil revenues over the two years are the same for both pumps, namely, $20 million. The advantage of the large pump is that it allows 50% of the revenues to be realized a year earlier than with the small pump.
TABLE ST7.4

If the firm's MARR is known to be 20%, what do you recommend based on the IRR criterion?

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Current Pump Larger Pump Investment, year 0 Revenue, year 1 $10 million 20 million Revenue, year 2 S10 million 0 $1.6 million