Two mutually exclusive investment opportunities require an initial investment of $6 million. Investment A then generates $1.50 million per year in perpetuity, while investment B pays $1.20 million in the first year, with cash flows increasing by 4% per year after that. At what cost of capital would an investor regard both opportunities as being equivalent?

Two mutually exclusive investment opportunities require an initial investment of $6 million. Investment A then generates $1.50 million per year in perpetuity, while investment B pays $1.20 million in the first year, with cash flows increasing by 4% per year after that. At what cost of capital would an investor regard both opportunities as being equivalent?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section: Chapter Questions

Problem 7P

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