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, for what values of the cost of capital
does picking the higher IRR give the correct answer as to which investment
is the best opportunity?