Two mutually exclusive investment opportunities require an initial investment of $5 million. Investment A then generates $1.5 million per year in perpetuity, while investment B pays $1 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?

Question

Quizplus · Accepted Answer

The correct answer is A because the cost of capital that makes both opportunities equivalent is 9%.

Two Mutually Exclusive Investment Opportunities Require an Initial Investment of $5