are deciding between two mutually exclusive investment opportunities. Both require the same initial investment of $10.4 million. Investment A will generate $1.82 million per year (starting at the end of the first year) in perpetuity. Investment B will generate $1.41 million at the end of the first year, and its revenues will grow at 2.3% 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 6.4%? 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? b. Which investment has the higher NPV when the cost of capital is 6.4%? The NPV of investment A is $18.04 million. (Round to two decimal places.) The NPV of investment B is $23.99 million. (Round to two decimal places.) You should pick investment B (Select from the drop-down menu.)
are deciding between two mutually exclusive investment opportunities. Both require the same initial investment of $10.4 million. Investment A will generate $1.82 million per year (starting at the end of the first year) in perpetuity. Investment B will generate $1.41 million at the end of the first year, and its revenues will grow at 2.3% 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 6.4%? 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? b. Which investment has the higher NPV when the cost of capital is 6.4%? The NPV of investment A is $18.04 million. (Round to two decimal places.) The NPV of investment B is $23.99 million. (Round to two decimal places.) You should pick investment B (Select from the drop-down menu.)
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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I just need someone to verify that these are correct. If not, could you explain what I did incorrectly?
To get the NPV for each I used the perpetuity formula but subtracted the initial investment from whatever it gave me. For example, for the first one I did [(1,820,000/.064) - $10,400,000]
Transcribed Image Text:You are deciding between two mutually exclusive investment opportunities. Both require the same initial investment of $10.4 million. Investment A
will generate $1.82 million per year (starting at the end of the first year) in perpetuity. Investment B will generate $1.41 million at the end of the first
year, and its revenues will grow at 2.3% 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 6.4%?
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?
b. Which investment has the higher NPV when the cost of capital is 6.4%?
The NPV of investment A is $18.04 million. (Round to two decimal places.)
The NPV of investment B is $23.99 million. (Round two decimal places.)
You should pick investment B
(Select from the drop-down menu.)
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