Question: 5. You are deciding between two mutually exclusive investment projects. Both require the same upfront investment of $9.8 million. Investment A will generate $2 million

5. You are deciding between two mutually exclusive investment projects. Both require the same upfront investment of $9.8 million. Investment A will generate $2 million per year in perpetuity (starting from the end of the first year) and Investment B will generate $1.45 million per year at the end of first year and, after the first year, its revenue will grow at 2.6% per year in perpetuity. The discount rate is 7.8%.

a) Which project has a higher IRR? [7.5 marks]

b) Which project would you choose to invest? Why? [7.5 marks]

5. You are deciding between two mutually exclusive investment projects. Both require the same upfront investment of S9.8 million. Investment A will generate S2 million per year in perpetuity (starting from the end of the first year) and Investment B will generate $1.45 million per year at the end of first year and, after the first year, its revenue will grow at 2.6% per year in perpetuity. The discount rate is 7.8%. a) Which project has a higher IRR? [7.5 marks] b) Which project would you choose to invest? Why? [7.5 marks]

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