Two Mutually Exclusive Investment Opportunities Require an Initial Investment of $7

question 33

Multiple Choice

Two mutually exclusive investment opportunities require an initial investment of $7 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?

• A) 4%
• B) 8%
• C) 15%
• D) 17%

---

Definitions:

Intrinsic Motivation

Motivation driven by an interest or enjoyment in the task itself, rather than relying on external pressure or reward.

Inherent Motivation

Internal drive to perform actions for their own sake, due to personal satisfaction or interest.

Extrinsic Motivation

Motivation driven by external rewards such as money, grades, or praise.

Seniority-Based Pay

A compensation system where an employee's wage or salary is determined by their length of service in the company.