You are asked to evaluate two mutually exclusive investment

projects. Both projects 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.

Required:

(a) Which investment has the higher IRR? Which investment has the

higher NPV when the cost of capital is 7%? [25]

(b) Advise to the finance director which project should be selected, and

explain the rationale of your choice. [25]

(c) Advise to the finance director at what value of the cost of capital the

two investment criteria would provide the same conclusion on the

choice of the project. [25]

(d) Assume that both projects are not in line with the current business

of the firm. Advise to the finance director how the firm would set a

project-specific discount rate. [25]