Consider the following cash flows on two mutually exclusive projects for the Bah

Question

Consider the following cash flows on two mutually exclusive projects for the Bahamas Recreation Corporation (BRC). Both projects require an annual return of 17 percent.

Compute the IRR for both projects. (Do not round intermediate calculations. Round your answers to 2 decimal places. (e.g., 32.16))

Based on the IRR, which project should you choose?

Calculate the incremental IRR for the cash flows. (Do not round intermediate calculations. Round your answer to 2 decimal places. (e.g., 32.16))

Based on the incremental IRR, which project should you choose?

Compute the NPV for both projects.(Do not round intermediate calculations. Round your answers to 2 decimal places. (e.g., 32.16))

Based on the NPV, which project should you choose?

Is it consistent with the incremental IRR rule?

Consider the following cash flows on two mutually exclusive projects for the Bahamas Recreation Corporation (BRC). Both projects require an annual return of 17 percent.

Explanation / Answer

Year Cash flows Deeper Fishing New Submarine 0           (1,010,000)                (1,970,000) 1                 430,000                  1,020,000 2                 558,000                      860,000 3                 480,000                      870,000 Required Return 17% IRR = 20.84% 19.35% Application of IRR function in excel Project Deeper Fishing should accepted as the IRR is more than New Submarine. Year Cash flows Deeper Fishing New Submarine Incremental Cash flows 0           (1,010,000)                (1,970,000)                 (960,000) 1                 430,000                  1,020,000                   590,000 2                 558,000                      860,000                   302,000 3                 480,000                      870,000                   390,000 IRR = 17.59% Application of IRR function in excel As the incremrental cash flows IRR is more than the required return, the New submarine project should be accepted. Year Cash flows Deeper Fishing New Submarine 0           (1,010,000)                (1,970,000) 1                 430,000                  1,020,000 2                 558,000                      860,000 3                 480,000                      870,000 Required Return 17% NPV =             64,845.80                  73,238.91 Application of NPV function in excel As the NPV of Newsubmarine project is more, it should be selected because it gives the absolute cash flows. Yes, it is consistent with incremental IRR rule because under both the case New submarine project should be selected.

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