u are deciding between two mutually exclusive investment opportunities. Both require the same initial investment of $9.8 million. Investment A will generate $2.06 million per year​ (starting at the end of the first​ year) in perpetuity. Investment B will generate $1.51 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 5.5%​? c. In this​ case, for what values of the co

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
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You are deciding between two mutually exclusive investment opportunities. Both require the same initial investment of
$9.8
million. Investment A will generate
$2.06
million per year​ (starting at the end of the first​ year) in perpetuity. Investment B will generate
$1.51
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
5.5%​?
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?
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