You are deciding between two mutually exclusive investment opportunities. Both require the same initial investment of $
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Question:
You are deciding between two mutually exclusive investment opportunities. Both require the
same initial investment of $ million. Project will generate $ million per year starting at
the end of the first year in perpetuity. Project will generate $ million at the end of the first
year and its cash flow will grow at per year for every year after that.
a Calculate the IRR for each project. Which project would you choose based on the IRR rule?
b Suppose the cost of capital is Which project would you choose if you used the
discounted payback rule with a cutoff period of years?
c Which project would you choose based on the NPV rule? Consider the following two
scenarios for the cost of capital:
i Assume that the cost of capital is
ii Assume that the cost of capital is
d For what range of values for the cost of capital would you choose Project and for what
range of values for the cost of capital would you choose Project Briefly motivate your
answer.
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