You are deciding between two mutually exclusive investment opportunities. Both require the same initial investment of $10 million. Investment A will generate $2 million per year (starting at the end of the first year) in perpetuity. Investment B will generate $1.5 million at the end of the first year and its revenues will grow at 2% per year for every year after that. (1) Which investment has the higher IRR? (2) Which investment has the higher NPV when the cost of capital is 7%? (3) In this case, for what values of the cost of capital does picking the higher IRR give the correct answer as to which investment is the best opportunity?
You are deciding between two mutually exclusive investment opportunities. Both require the same initial investment of $10 million. Investment A will generate $2 million per year (starting at the end of the first year) in perpetuity. Investment B will generate $1.5 million at the end of the first year and its revenues will grow at 2% per year for every year after that. (1) Which investment has the higher IRR? (2) Which investment has the higher NPV when the cost of capital is 7%? (3) In this case, for what values of the cost of capital does picking the higher IRR give the correct answer as to which investment is the best opportunity?
Chapter5: The Time Value Of Money
Section: Chapter Questions
Problem 22P
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You are deciding between two mutually exclusive investment opportunities. Both require the same initial investment of $10 million. Investment A will generate $2 million per year (starting at the end of the first year) in perpetuity. Investment B will generate $1.5 million at the end of the first year and its revenues will grow at 2% per year for every year after that.
(1) Which investment has the higher
(2) Which investment has the higher
(3) In this case, for what values of the cost of capital does picking the higher IRR give the correct answer as to which investment is the best opportunity?
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