You are deciding between two mutually exclusive investment opportunities. Both require the same initial investment of...

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Finance

You are deciding between two mutually exclusive investmentopportunities. Both require the same initial investment of $9.8million. Investment A will generate $2.11million per year?(starting at the end of the first? year) in perpetuity. InvestmentB will generate $1.43 million at the end of the first? year, andits revenues will grow at 2.2% per year for every year afterthat.
a. Which investment has the higher IRR??
b. Which investment has the higher NPV when the cost of capitalis 6.6%??
c. In this? case, when does picking the higher IRR give thecorrect answer as to which investment is the best? opportunity?

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4.1 Ratings (628 Votes)

Part a Investment A Net present value NPVCash flow per yearRequired returnInitial cash outflow Given that cash flow per year211 million Initial cash outflow98 million When NPV becomes zero required rate becomes internal rate of return or IRR Equating NPV to zero we get Cash flow per yearRequired rateInitial cash outflow0 211IRR980 211IRR98 21198IRR IRR0215306122 or 2153 Rounded up to two decimal places Investment B NPVCash flow at the end of the first yearRequired returnGrowth See Answer

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You are deciding between two mutually exclusive investmentopportunities. Both require the same initial investment of $9.8million. Investment A will generate $2.11million per year?(starting at the end of the first? year) in perpetuity. InvestmentB will generate $1.43 million at the end of the first? year, andits revenues will grow at 2.2% per year for every year afterthat.a. Which investment has the higher IRR??b. Which investment has the higher NPV when the cost of capitalis 6.6%??c. In this? case, when does picking the higher IRR give thecorrect answer as to which investment is the best? opportunity?