You are deciding between two mutually exclusive investment opportunities. Both requife the same initial investment of $10 million. Investment A will generate $2.3 million per year (starting at the end of the first year) in perpetuity. Investment B will generate $1.8 million at the end of the first year, and its revenues will grow at 3.3% per year for every year after that. Use the incremental IRR rule to correctly choose between investments A and B when the cost of capital is 7.2%. At what cost of capital would your decision change?
You are deciding between two mutually exclusive investment opportunities. Both requife the same initial investment of $10 million. Investment A will generate $2.3 million per year (starting at the end of the first year) in perpetuity. Investment B will generate $1.8 million at the end of the first year, and its revenues will grow at 3.3% per year for every year after that. Use the incremental IRR rule to correctly choose between investments A and B when the cost of capital is 7.2%. At what cost of capital would your decision change?
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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Transcribed Image Text:You are deciding between two mutually exclusive investment opportunities. Both require
the same initial investment of $10 million. Investment A will generate $2.3 million per year
(starting at the end of the first year) in perpetuity. Investment B will generate $1.8 million
at the end of the first year, and its revenues will grow at 3.3% per year for every year after
that. Use the incremental IRR rule to correctly choose between investments A and B when
the cost of capital is 7.2%. At what cost of capital would your decision change?
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