Consider the following cash flows on two mutually exclusve projects for the Baha

Question

Consider the following cash flows on two mutually exclusve projects for the Bahamas Recreation Corporation (BRC) Both projects require an annual returm of 17 percent New Submarine ear Fishing 0 -$1,020,000-$1,990,000 1,040,000 870,000 890,000 440,000 566,000 490,000 a-1. Compute tho IRR for both grojcts (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g, 32.16) Deepwater Fishing Submarine Ride 2 Based on the IRR, which project should you choose? O Deepwater Fishing O Submanine Ride b-1. Calculate the incremental IRR for the cash fows (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g. 32.16 emental IRR Based on the incremental IRR, which project should you choose? O Submarnne Ride O Deepwater Fishing Esc 4

Explanation / Answer

Deepwater Fishing Year Cashflow 0 ($1,020,000) 1 $440,000 2 $566,000 3 $490,000 InternalRate of Return (IRR) 21.42% (Using IRR fncturn of excel over the cash flow) New Submarine Ride Year Cashflow 0 ($1,990,000) 1 $1,040,000 2 $870,000 3 $890,000 InternalRate of Return (IRR) 19.86% (Using IRR fncturn of excel over the cash flow) IRR Deepwater Fishing 21.42% New Submarine Ride 19.86% Based on the IRR, Project Chosen Deepwater Fishing CALCULATION OF INCREMENTAL IRR A B B-A Year Cash flowDeepwater fishing Cash flow New Submarine IncrementalCash flow 0 ($1,020,000) ($1,990,000) ($970,000) 1 $440,000 $1,040,000 $600,000 2 $566,000 $870,000 $304,000 3 $490,000 $890,000 $400,000 InternalRate of Return (IRR) 18.02% (Using IRR fncturn of excel over the incremental cash flow) Required Rate of Return 17% Based on Incremental Rate of Return Project chosen New Submarine Ride CALCULATION OF NPV: Present Value (PV) of Cash Flow: (Cash Flow)/((1+i)^N) i=Discount Rate=Required return=17%=0.17 N=Year of Cash Flow Deepwater Fishing N A B=A/(1.17^N) Year Cashflow PV of Cash flow 0 ($1,020,000) $       (1,020,000) 1 $440,000 $             376,068 2 $566,000 $             413,471 3 $490,000 $             305,942 SUM $                75,481 NPV=SUM of PV of cash flows= $        75,481 New Submarine Ride N A B=A/(1.17^N) Year Cashflow PV of Cash flow 0 ($1,990,000) $       (1,990,000) 1 $1,040,000 $             888,889 2 $870,000 $             635,547 3 $890,000 $             555,690 SUM $                90,125 NPV=SUM of PV of cash flows= $        90,125 NPV Deepwater Fishing $        75,481 New Submarine Ride $        90,125 Based on NPV ,Project Selected: New Submarine Ride Yes, NPV decisionis consistent with incremental IRR rule

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