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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? Explain your answer. (4 points)

(b) Which investment has the higher NPV when the cost of capital is 7%? Explain how you arrived at your answer. (4 points) (c) In this case, when does picking the higher IRR give a correct answer as to which investment is the better opportunity? Explain. (7 points)

(d) One of the most important decisions facing a financial manager is choosing which investments the corporation should make. Such decisions are particularly important when a firm cannot choose all the investment projects it would like because it has only limited funds. These decisions fundamentally drive value in the corporation. Managers can use various investment decision rules to guide them. The most popular are the NPV, IRR, and payback rules.

Write an essay to evaluate the usefulness of each of these decision rules. Your essay should describe the rationale behind each rule, and its potential strengths and weaknesses. In your conclusion, you should summarize the main points of your evaluation, explicitly stating which rule is the most appropriate for managers to use when making investment decisions. (30 points)

In preparing your essay, you should use the assignment outline template with the appropriate subheadings. Your essay should thoroughly evaluate the various investment decision rules.

You should use at least three sources of information to support your statements. These sources can be scholarly articles from academic journals, business magazines (such as Harvard Business Review, or MIT Sloan Management Review) or other credible sources.

You are to follow APA formatting style in typing your answer with respect to in-text citations and the preparation of the References list.

Assignment Instructions

Your answer must address all parts (a-d) of this assignment. Your answer to part (d) should be written in essay style with paragraphs. Your views must be explained using where applicable relevant theories and real-world examples. Your answers should be typed using 1.5 spacing in a Word document. You should include a Title page, in-text citations and a References list. 

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