Two mutually exclusive investment opportunities require an initial investment of $10 million. Investment A pays $1.5 million per year in perpetuity, while investment B pays $1.2 million in the first year, with cash flows increasing by 3% per year after that. At what cost of capital would an investor regard both opportunities as being equivalent?

15%

Solving this would require finding the rate/cost of capital that gives both investments the same present value.

Investment 1

Investment 1 is a perpetuity which means that it's present value can be calculated as,

= Amount/rate

= 1,500,000/r

Investment 2

Investment 2 pays $1,200,000 in the first year and then grows at a rate of 3% every year afterwards.

The Present Value of such can be calculated with the following equation,

= Amount / ( rate/cost of capital - growth rate)

= 1,200,000 / ( r - 3%)

To find the Rate that gives both figures the same Present Value, simply equate them.

1,500,000/r = 1,200,000 / (r - 3%)

1,500,000(r - 3% ) = 1,200,000r

1,500,000r - 45,000 = 1,200,000r

300,000r = 45,000

r = 45,000/300,000

r= 0.15

r = 15%

At 15% an investor regard both opportunities as being equivalent.

15 1/2 years old in california

muslims control the north africa during the period of 1500 up

to 1800. they made a barrier to prevent further european exploration from

entering the africa from the north. however, the dutch ware still able to move

toward the interior with having south africa as one of the routes leading to

the east for trading with asia.