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 18 percent. Year Deepwater Fishing New Submarine Ride 0 $ 1,045,000 $ 2,040,000 1 465,000 1,090,000 2 586,000 895,000 3 515,000 940,000 a-1. 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).) IRR Deepwater Fishing % Submarine Ride % a-2. Based on the IRR, which project should you choose? Deepwater Fishing Submarine Ride b-1. 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).) Incremental IRR % b-2. Based on the incremental IRR, which project should you choose? Deepwater Fishing Submarine Ride c-1. Compute the NPV for both projects. (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).) NPV Deepwater Fishing $ Submarine Ride $ c-2. Based on the NPV, which project should you choose? Deepwater Fishing Submarine Ride

Explanation / Answer

Year Deepwater Fishing New Submarine Ride 0 -$1,045,000 -$2,040,000 1 $465,000 $1,090,000 2 $586,000 $895,000 3 $515,000 $940,000 a)1 IRR 22.82% 21.09% a) 2 Based on IRR Deepwater fishing project would be seleted. b) To calculate the incremental IRR, we subtract the smaller project’s cash flows from the larger project’s cash flows. In this case, we subtract the deepwater cash flows from the submarine cash flows. Year New Submarine Ride Deepwater Fishing Incremental Cashflows 0 -$2,040,000 -$1,045,000 -$995,000 1 $1,090,000 $465,000 $625,000 2 $895,000 $586,000 $309,000 3 $940,000 $515,000 $425,000 Incremental IRR 19.04% Based on Incremental IRR , Deepwater fishing would be selected. c) NPV Year Deepwater Fishing New Submarine Ride PV @18% Present Value of Deepwater Fishing Present Value of New Submarine 0 -$1,045,000 -$2,040,000 1.0000 -$1,045,000 -$2,040,000 1 $465,000 $1,090,000 0.8475 $394,067.8 $923,728.81 2 $586,000 $895,000 0.7182 $420,856.08 $642,775.06 3 $515,000 $940,000 0.6086 $313,444.9 $572,113.02 NPV $83,368.77 $98,616.9 Based on NPV Deepwater fishing would be selected.

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.