Question

ju are decling bělween two mutually exclusive investment opportunities Both require the same intial investment of $10.4 million Investment A will gonerate $2 03 millon per year (starting at the end of the rst year in perpetuity. Investment wil generate S1 53 milion at the end of the 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 7 9%? c. In this case, when does picking the higher IRR give the correct answer as to which investment is the best opportunity? rst year, and ts reven es wil gow at 24% a. Which investment has the higher IRR? The IRR of investment A is L1% (Round to two decimal places )

Answer 1

1.
IRR:
Investment 1=2.03/10.4=19.519%

Investment 2=1.53/10.4+2.4%=17.112%

Investment 1 has the higher IRR

2.
NPV:
Investment 1=-10.4+2.03/7.9%=15.29620253 million

Investment 2=-10.4+1.53/(7.9%-2.4%)=17.41818182 million

Investment 2 has higher NPV

3.
crossover rate:
2.03/r=1.53/(r-2.4%)
=>r=9.744%

Hence, when cost of capital is more than 9.744%