Problem:
Suppose we have two mutually exclusive land development projects. The first is a office building which can be constructed for an initial outlay of $20 million and sold a year later for $24 million. The other use of the land is for a parking lot where an initial outlay of $10,000 will produce a cash inflow of $10,000 per year forever. The NPV of the building project is given by: NPVB = -$20,000,000 + [$24,000,000/(1 + i)] where i is the cost of capital. The NPV of the perpetuity producing parking project is given by the expression: NPVp = -$10,000 + ($10,000/i).
1. Calculate the NPVs of both projects at a 15% cost of capital.
2. Calculate the IRRs of both projects.