Problem:
Two mutually exclusive investment opportunities require an initial investment of $5 million. Investment A then generates $1.5 million per year in perpetuity, while investment B pays $1 million in the first year, with cash flows increasing by 3% per year after that.
Required:
At what cost of capital would an investor regard both opportunities as being equivalent?
A.) 3%
B.) 6%
C.) 9%
D.) 10%
Note: Please provide full description.