Question

You are deciding between two mutually exclusive investment opportunities. Both require the same initial investment of $ 10.3 million. Investment A will generate $ 2.04 million per year (starting at the end of the first year) in perpetuity. Investment B will generate $ 1.47 million at the end of the first year, and its revenues will grow at 2.4 % per year for every year after that. a. Which investment has the higher IRR? b. Which investment has the higher NPV when the cost of capital is 6.6 %? c. 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?

Answer 1