Question

You are deciding between two mutually exclusive investment opportunities. Both require the same initial investment of $30 million. Investment A will generate annual cash flows of $4 million beginning one year from now and continuing in perpetuity. Investment B will generate a cash flow of $3 million one year from now every year thereafter it will generate a cash flow that is 3% bigger than the prior cash flow. Assuming that both projects have the same cost of capital, at what cost of capital will you be indifferent between the two projects? Enter your answer as a percent without the “%”; round your final answer to two decimals.

Answer 1

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W @VO ( Ix 2 ENG 00:51 21-03-2020 • O X GU736 - X fic GT GU GV GW GX GY GZ HA HB HC HA PV OF PERPETUAL CASH FLOWS = ANNUAL CF/(WACC-g) 721 722 723 724 725 726 727 INVESTMENT A HAS NOT GROWTH IN CASH FLOWS, SO g =0 INVESTMENT B HAS GROWTH IN CASH FLOWS, SO g =3% 728 729 730 731 732 733 734 WE HAVE TO EQUATE BOTH CASHFLOW SERIES TO GET THE ANSWER : find crossover rate 4/r = 3/(r-0.03) 4(r-0.03) = 3r 48 -0.12 = 3r r= 0.12 12.00% crossover rate ANSWER r = 735 737 738 739 740 741 742 743 744 ... HPR GMAM EAC MACRS RELEVANT MI-np-ir NPV BETA LEVERED REPLACEMENT BOND OPTION TO WAIT STEIN indiffEPS EBIT LEASE SLM GOLF ...