You are deciding between two mutually exclusive investment projects. Both require the same upfront investment of $9.8 million. Investment A will generate $2 million per year in perpetuity (starting from the end of the first year) and Investment B will generate $1.45 million per year at the end of first year and, after the first year, its revenue will grow at 2.6% per year in perpetuity. The discount rate is 7.8%. a) Which project has a higher IRR? b) Which project would you choose to invest? Why?
You are deciding between two mutually exclusive investment projects. Both require the same upfront investment of $9.8 million. Investment A will generate $2 million per year in perpetuity (starting from the end of the first year) and Investment B will generate $1.45 million per year at the end of first year and, after the first year, its revenue will grow at 2.6% per year in perpetuity. The discount rate is 7.8%. a) Which project has a higher IRR? b) Which project would you choose to invest? Why?
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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a and b please thank you
Transcribed Image Text:You are deciding between two mutually exclusive investment projects. Both require the
same upfront investment of $9.8 million. Investment A will generate $2 million per year
in perpetuity (starting from the end of the first year) and Investment B will generate $1.45
million per year at the end of first year and, after the first year, its revenue will grow at
2.6% per year in perpetuity. The discount rate is 7.8%.
a) Which project has a higher IRR?
b) Which project would you choose to invest? Why?
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