Question

You are deciding between two mutually exclusive investment opportunities. Both require the same initial investment of

$9.6 million.

Investment A will generate

$1.94

million per year​ (starting at the end of the first​ year) in perpetuity. Investment B will generate

$1.43

million at the end of the first​ year, and its revenues will grow at

2.4%

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

7.8%​?

c. In this​ case, when does picking the higher IRR give the correct answer as to which investment is the best​ opportunity?

Answer 1