7-21. 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 thecorrect answer as to which investment is the best opportunity? 3 2 2 r r −
7-22. You have just started your summer internship, and your boss asks you to review a recent analysis that was done to compare three alternative proposals to enhance the firm’s manufacturing facility. You find that the prior analysis ranked the proposals according to their IRR, and recommended the highest IRR option, Proposal A. You are concerned and decide to redo the analysis using NPV to determine whether this recommendation was appropriate. But while you are confident the IRRs were computed correctly, it seems that some of the underlying data regarding the cash flows that were estimated for each proposal was not included in the report. For Proposal B, you cannot find information regarding the total initial investment that was required in year 0. And for Proposal C, you cannot find the data regarding additional
You've reached the end of your free preview.
Want to read all 6 pages?
- Summer '16
- Net Present Value