Annual Discount Rate 10 Initial Investment 10000000 Year 1 5000000 Year 2

# Annual discount rate 10 initial investment 10000000

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Annual Discount Rate 10%
Initial Investment -10000000 Year 1 5000000 Year 2 2000000 NPV Excel Function (\$3,456,048.08) The movie would have a negative NPV of (-) \$3,456,048.08 with the cost of capital of 10 percent if the project continued for a 2-year period. 7-21 NPVs and IRR's for Mutually Exclusive Projects 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? NPV Project A NPV=0 r = 2*10 = 20 r=20% NPV Project B NPV=0 1.5=(r-0.02)(10) 1.5/10 = (r-0.02) (10/10) 0.15+0.02=r r=0.15+0.02 r=0.17 r=17% The investment that would have the higher IRR would be Project A at 20%. b. Which investment has the higher NPV when the cost of capital is 7%? Project A NPV = (2 / 0.07) – 10 = \$18.571 million Project B NPV =(1.5 / (0.07 – 0.02)) – 10 = 30 – 10 = \$20 million The investment that has the higher NPV when the cost of capital is 7% is Project B for \$20 million. c. In this case, for what values of the cost of capital does picking the higher IRR give the correct answer as to which investment is the best opportunity?

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• Spring '10
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• Net Present Value, PAYBACK PERIOD, Pisa Pizza, new pizza