Question

Consider the following cash flows on two mutually exclusive projects for the Bahamas Recreation Corporation (BRC). Both projects require an annual return of 17 percent.

  

Year	Deepwater Fishing			New Submarine Ride
0	−$	1,020,000		−$	1,990,000
1		440,000			1,040,000
2		566,000			870,000
3		490,000			890,000

  

a-1.	Compute the IRR for both projects. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

      

a-2.	Based on the IRR, which project should you choose?
	Submarine Ride Deepwater Fishing

  

b-1.	Calculate the incremental IRR for the cash flows. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

      

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 and round your answers to 2 decimal places, e.g., 32.16.)

      

c-2.	Based on the NPV, which project should you choose?
	Deepwater Fishing Submarine Ride

  

c-3.	Is the NPV decision consistent with the incremental IRR rule?
	Yes No

Answer 1

A-1: IRR-Deepwater = 21.42%

New Submarine Ride= 19.86%

A-2: Select Deepwater since it has higher IRR

B-1: Incremental IRR = 18.02%

B-2: New Submarine Ride since the incremental IRR is more than the cost of capital.

C-1 NPV

Deepwater Fishing= 75480.62

New Submarine Ride= 90125.47

C-2: New Submarine Ride since it has higher NPV

C-3 No since the decisions differ.

Year	Deepwater Fishing	New Submarine Ride	Incremental CF
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
IRR	21.42%	19.86%	18.02%
NPV	75480.62	90125.47