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

question 11

Multiple Choice

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?

• A) 9%
• B) 10%
• C) 3%
• D) 6%

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Definitions:

Downs Syndrome

A genetic disorder caused by the presence of all or part of a third copy of chromosome 21, characterized by physical growth delays and mild to moderate intellectual disability.

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A fluid-filled sac that surrounds and protects a fetus in the uterus during pregnancy.

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The medical termination of a pregnancy before the fetus is capable of independent life.

Embryo

An embryo is an early stage of development in multicellular organisms, following fertilization and before becoming a fetus.