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. Required:
a. Plot the NPV profile for each project.
b. What is the IRR for each project?
c. Which investment has the higher NPV when the cost of capital is 7%?
d. Which investment has the higher NPV when the cost of capital is 9%?
e. 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?