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Higher IRR and NPV

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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.

a. Which investment has the higher IRR?
b. Which investment has the higher NPV when the cost of capital is 7%?
c. In this case, when does picking the higher IRR give the correct answer as to which investment is the best opportunity?

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Solution Summary

This response contrasts the IRR and NPV of two different investment.

Solution provided by:
Manal Elkhoshkhany, MBA
Education
  • BA, Ain Shams University, Cairo Egypt
  • MBA, California State University, Sacramento
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