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%. Year Deepwater Fishing New Submarine Ride 0 -600,000 -1,800,000 1 270,000 1,000,000 2 350,000 700,000 3 300,000 900,000 as a financial analyst for BRC, you are asked the following questions: a. Based on the discounted payback period rule, which project should be chosen? b. If your decision rule is to accept the project with the greater IRR, which project should you use? c. Since you are fully aware of the IRR rule’s scale problem, you calculate the modified IRR (MIRR) for the two projects. Based on your computation, which project should you choose? d. To be prudent, you compute the NPV for both projects. Which project should you choose? Is it consistent with the MIRR rule?

Answer 1

The discounted payback period =2.510 years for Deep water Fishing

The discounted Payback Period =2.678 years for New Submarine Ride

Based on the discounted payback period rule the Depp water fishing projects must be selected since it has lower discounted payback period.

b.The IRR for Deep water fishing=24.30%

The IRR for New Submarine ride =21.46%

Based on the IRR rule Project Deep Water Fishing would be selected due to higher IRR

c.The Modified IRR for Deep Water Fishing=20.87%

The Modified IRR for New Submarine Ride =18.92%

Based on MIRR project Deep Water Fishing should be accepted due to higher MIRR

d.The NPV of Deep Water Fishing =$96,987.76

The NPV of New Submarine Ride =190630.39

Based on NPV New Submarine Ride should be chosen due to higher NPV.No, the MIRR and NPV results are not in agreement with each other.