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	−$	1,035,000		−$	2,020,000
1		455,000			1,070,000
2		578,000			885,000
3		505,000			920,000

  

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?
	Submarine Ride Deepwater Fishing

  

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?
	Submarine Ride Deepwater Fishing

   

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?
	Submarine Ride Deepwater Fishing

  

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

Answer 1

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.)

	Deepwater Fishing	New Submarine Ride
0	-1035000	-2020000
1	455000	1070000
2	578000	885000
3	505000	920000
IRR using excel IRR Funtion	22.27%	20.61%

a-2.	Based on the IRR, which project should you choose?

Deepwater Fishing

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.) Deepwater Fishing New Submarine Ride Incremental Cash Flow 0 -1035000 -2020000 -985000 1 455000 1070000 615000 2 578000 885000 307000 3 505000 920000 415000 IRR using excel IRR Funtion 18.64%

Based on the incremental IRR, which project should you choose?

New Submarine Ride

Compute the NPV for both projects. (Do not round intermediate calculations. Round your answers to 2 decimal places, e.g., 32.16.) Deepwater Fishing PV factor 18% PV 0 -1035000                        1.00000             -10,35,000.00 1 455000                        0.84746                 3,85,593.22 2 578000                        0.71818 4,15,110.60 3 505000                        0.60863                 3,07,358.59 NPV 73062.41

	New Submarine Ride	PV factor 18%	PV
0	-2020000	1.00000	-20,20,000.00
1	1070000	0.84746	9,06,779.66
2	885000	0.71818	6,35,593.22
3	920000	0.60863	5,59,940.40
NPV			82,313.28

Based on the NPV, which project should you choose?

New Submarine Ride

Is the NPV decision consistent with the incremental IRR rule?

Yes