Answer Without Excel

You are deciding between two mutually exclusive investment opportunities. Both require the same initial investment of $25 million. Investment A will generate $8 million per year (starting at the end of the first year) in perpetuity. Investment B will generate $4 million at the end of the first year and its cash flow will grow at 6% 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 10%?

c. For what range of discount rates would you choose project A and for what range of discount rates would you choose project B? (Consider only discount rates greater than 6%.)