I was recently asked to evaluate two investments and I was really unsure.
- Rate of return = 10%
- Investment 1: Up-front cost = 100K; Cash Flow = 17K per year (perpetual) --> NPV = 70K
- Investment 2: Up-front cost = 200K; Cash flow = 30K per year (perpetual) --> NPV = 100K
Which one is better?
- Pros: NPV2 is higher
- Cons: higher capital required (probably not included in the formula, because we could assume that it's riskier and therefore it should have a higher 'r')
- Pros: higher profitability (17% v. 15%), lower capital requirements, lower risk
- Cons: lower NPV
Thank you for your support, looking forward to hearing your answers!