Question

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

$ 10.1 million

Investment A will generate

$ 2.13 million per year​ (starting at the end of the first​ year) in perpetuity. Investment B will generate

$ 1.58 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

6.6 %6.6%​?

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

a. Which investment has the higher

IRR​?

The IRR of investment A is

nothing​%.

​(Round to two decimal​ places.)

Answer 1

a. IRR of A =Cash Flow per year /Initial Investment =2.13/10.1 =21.09%
IRR of B =Cash Flow per year /Initial Investment +Growth =1.58/10.1+2.4% =18.04%
A had higher IRR
b . NPV of A =Cash flow/ Required Rate- Initial Investment =2.13/6.6%-10.1 =22.17
NPV of B =Cash flow/ (Required Rate-growth)- Initial Investment =1.58/(6.6%-2.4%)-10.1 =27.52
B has higher NPV

c. When IRR and NPV both are higer then IRR gives correct answeras to which investment is the best​ opportunity.