You are deciding between two mutually exclusive investment opportunities. Both require the same initial investment of $9.8 million. Investment A will generate $1.84 million per year? (starting at the end of the first? year) in perpetuity. Investment B will generate $1.57 million at the end of the first? year, and its revenues will grow at 2.3% 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 5.6%??
2. AOL is considering two proposals to overhaul its network infrastructure. They have received two bids. The first bid from Huawei will require a $16 million upfront investment and will generate $20 million in savings for AOL each year for the next 33 years. The second bid from Cisco requires a $88 million upfront investment and will generate $60 million in savings each year for the next 33 years.
a. What is the IRR for AOL associated with each? bid?
b. If the cost of capital for each investment is 20%?, what is the net present value (NPV?) of each? bid?Suppose Cisco modifies its bid by offering a lease contract instead. Under the terms of the? lease, AOL will pay $23 million? upfront, and $35 million per year for the next 33 years.? AOL's savings will be the same as with? Cisco's original bid.
c. What is the IRR of the Cisco bid? now?
d. What is the new NPV??
e. What should AOL? do?