Question

Please show all work in order to get credit on an excel file. If you provide only the answers without showing your work, I will not be able to provide any credit if your answer is wrong.

Petrus has an opportunity to make two investments, but he can only afford to make one of them. Each one costs $ 25,000,000. The first investment can be sold in 14 years for $ 98,500,000 and has no periodic cash flow. The second investment has a $ 200,000 per month cash flow for 6 years followed by a cash flow of $ 400,000 per month for 8 years. The second investment has no resale value. Which investment is better, from the standpoint of IRR?

Answer 1

First investment
		IRR	=	Resale value/(1+r)^time
			=	98,500,000/(1+r)^14
	On solving the above equation we get IRR=10.29%
	Second invesrtment
	Year	Cashflow
	0	-25,000,000
	1	$2,000,000
	2	$2,000,000
	3	$2,000,000
	4	$2,000,000
	5	$2,000,000
	6	$2,000,000
	7	$4,000,000
	8	$4,000,000
	9	$4,000,000
	10	$4,000,000
	11	$4,000,000
	12	$4,000,000
	13	$4,000,000
	14	$4,000,000
	IRR is therate t which all cashflow becomes equal to initial investment at time 0
	$25,000,000	=	[$2,000,000/(1+r)^1]+[$2,000,000/(1+r)^2]+[$2,000,000/(1+r)^3]+[$2,000,000/(1+r)^4+[$2,000,000/(1+r)^5]+[$2,000,000/(1+r)^6]+[$4,000,000/(1+r)^7]+[$4,000,000/(1+r)^8]+[$4,000,000/(1+r)^9]+[$4,000,000/(1+r)^10]+[$4,000,000/(1+r)^11]+[$4,000,000/(1+r)^12]+[$4,000,000/(1+r)^13]+[$4,000,000/(1+r)^14]
	On solving the above equation we get IRR=7.25%
	we should select Investment 1 fromviewpoint of IRR as it has higher IRR.
	The equation ca be solved using excel or financial calculator only.there is no direct method to solve this equations