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

question 53

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)3%
• B)6%
• C)9%
• D)10%

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Definitions:

Purchases

The acquisition of goods or services in exchange for monetary payment in the course of business operations.

Outstanding Shares

The total number of shares of a corporation's stock that are currently owned by all its shareholders, including share blocks held by institutional investors and restricted shares owned by the company’s officers and insiders.

Corporation

A legal entity owned by shareholders, with the characteristic of limited liability, and capable of owning assets, suing or being sued.

Charter

A charter is a legal document that establishes a corporation or municipality and defines its rights, privileges, and purposes.