Question

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?

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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