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 15 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 15 percent.

Explanation / Answer

a-1
Using excel formula for IRR, or the financial calculator:
IRR for Deepwater Fishing = 18.06%
IRR for New Submarine Ride = 16.91%

a-2
Based on the IRR, Deepwater Fishing should be chosen.
Higher the IRR, more is the return.

b-1
Incremental IRR for Deepwater fishing over new submarine ride = 15.529%
(First take the difference between the two projects and then take the IRR for the difference).

b-2
As incremental IRR for Deepwater fishing over new submarine ride is positive, it means that Deepwater fishing is a better investment opportunity.
Decision: Invest in Deepwater Fishing

c-1

c-2
NPV of Submarine Ride > NPV of Deepwater Fishing
Hence, Submarine Ride should be selected

c-3
This is not consistent with the incremental IRR method.

Year Deepwater Fishing New Submarine Ride Difference 0 -965000 -1880000 915000 1 385,000 930,000 -545000 2 522,000 815,000 -293000 3 435,000 780,000 -345000 IRR Formula IRR(B2:B5) IRR(C2:C5) IRR(D2:D5) IRR 0.180579566 0.169067456 0.155297364

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