Question

You are deciding between two mutually exclusive investment opportunities. Both require the same initial investment of $9.5 million. Investment A will generate $2.14 million per year (starting at the end of the first year) in perpetuity. Investment B will generate $1.57 million at the end of the first year, and its revenues will grow at 2.7% 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

7.1%?

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

part B) pick investment B