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.