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.

Year Deepwater New Submarine

0 -970,000 -1,890,000

1 390,000 940,000

2 526,000 820,000

3 440,000 790,000

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

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

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

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. Calculation of NPV at 15%

NPV of Deepwater = 1,026,168.61 - 970,000 = $56,168.61

NPV of New Submarine = 1,956,866 - 1,890,000 = $66,866

B. Calculation of IRR:

Calculation of NPV at 20%:

NPV of Deepwater = 944,903.769 - 970,000 = -$25,096.231

NPV of New Submarine = 1,809,944 - 1,890,000 = -$80,056

So, the IRR is between 15% - 20%

By, Interpolation:

IRR of Deepwater: 15% + [56,168.61 x (20% - 15%) / {56,168.61 - (-25,096.231)}]

IRR of Deepwater = 18.46%

IRR of New Submarine = 15% + [ 66,866 x (20%- 15%) / {66,866 - (-80,056)}]

IRR of New Submarine = 17.28%

C. Calculation of Incremental IRR:

Calculation of NPV at 18%:

NPV = 890,263 - 920,000 = -$29,737

NPV at 15%:

NPV = 930,693.84 - 920,000 = $10,693.84

So, the Incremental IRR must be Between 15% - 18%

By Interpolation:

IRR = 15% + 10,693.84 x (18% - 15%) / {10,693.84 - (-29,737 )}]

IRR = 15.79%

DF(15%) Deepwater New Submarine 0 -970,000 -1,890,000 1 0.869565 390,000 339,130.35 940,000 817,391.1 2 0.756143 526,000 397,731.22 820,000 620,037.26 3 0.657516 440,000 289,307.04 790,000 519,437.64 1,026,168.61 1,956,866

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