Question

Petrus has an opportunity to make two investments, but he can only afford to make one...

Petrus has an opportunity to make two investments, but he can only afford to make one of them. Each one costs $ 25,000,000. The first investment can be sold in 14 years for $ 98,500,000 and has no periodic cash flow. The second investment has a $ 200,000 per month cash flow for 6 years followed by a cash flow of $ 400,000 per month for 8 years. The second investment has no resale value. Which investment is better, from the standpoint of IRR?

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Answer #1
Yr Cash Flow 1 Cash Flow 2
0 -25000000 -25000000
1 0 2400000
2 0 2400000
3 0 2400000
4 0 2400000
5 0 2400000
6 0 2400000
7 0 4800000
8 0 4800000
9 0 4800000
10 0 4800000
11 0 4800000
12 0 4800000
13 0 4800000
14 98,500,000 4800000
IRR 10.29% 9.94%
Cash flow 2 is better due to lower IRR , i.e. after cost of capital of 9.94 % company will start earning
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