Your company is considering two projects. Project Moon requires an initial investment of $30 million. The project will generate a cash flow of $2.7 million next year, and the cash flow is expected to grow at the rate of 3% in perpetuity. Project Mars requires an initial investment of $54 million, and will yield constant cash flows of $5 million in perpetuity.
(a) What is the payback period of Project Mars?
(b) What is the IRR of Project Mars?
(c ) Suppose that Project Mars has a cost of capital equal to 8%. At what cost of capital for Project Moon would you be indifferent between the two projects?
On parts (b) and (c ), please show your rates to at least two decimal places.