You are deciding between two mutually exclusive investment opportunities. Both r

Question

You are deciding between two mutually exclusive investment opportunities. Both require the same initial investment of $10 million. Investment A will generate $2 million per year (starting at the end of the first year) in perpetuity. Investment B will generate $1.5 million at the end of the first year and its revenues will grow at 2% 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 7%?

            c. In this case, when does picking the higher IRR give the correct answer as to

               which investment is the better opportunity?

Explanation / Answer

You are deciding between two mutually exclusive investment opportunities. Both r

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