Bernhard Stroh is the Master Brewer at the Lion\'s Head Brewery. Bernhard has th

Question

Bernhard Stroh is the Master Brewer at the Lion's Head Brewery. Bernhard has the approval to brew a new beer, but can't decide which: 1) a wheat beer; or 2) a pale ale. Both beers require an initial investment of $1,000,000. The operating cash flows for each project are shown in the table. Lion's Head shareholders required a rate of return of 10%. The Wheat project has an IRR of 15.36% and the Ale project has an IRR of 15.89%. Which project should Bernhard choose (and why)?

Year Wheat Ale

0 -1000000 -1000000

1 200000 900000

2 1100000 300000

a. choose the ale because its NPV is higher.

b. choose the wheat because its NPV is higher.

c. choose the wheat it generates more operating cash flows.

d. choose the ale project because its IRR is greater.

e. choose either because the both have the same NPV.

Explanation / Answer

Wheat NPV =>[(200000 * 0.909) + (1100000 * 0.826) ] - 1000000

=> $ 90400

Ale NPV =>[ (900000 * 0.909) + ( 300000 * 0.826) ] - 1000000

=> $65900

As per NPV wheat is to be considered, and as per IRR ale is better, but when two are inconsistent than its better to selsct as per NPV so, whaet should be selected

choose the wheat because its NPV is higher.

choose the ale because its NPV is higher.

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